Mike Lipper’s Monday Morning Musings
Stock Markets Becoming More Difficult
Editors:
Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Picking a portfolio
of currently attractive stocks is becoming more difficult around the world, both
for the portfolio managers and business managers. This is emphasized by the
media’s attention on popular indices, where a small number of stocks are driving
performance. The media, marketers, and unsophisticated investors chatter about
“The market”. However, today there are multiple sub-markets within the entire
universe of available stocks.
The job of a good
portfolio manager is to carefully select individual securities or funds. No
single account should be identical to another. Even if the two started out
identical, over time cash flows will create differences.
There is a
fundamental problem with what most scribes write about securities, as most
significant differences result from key critical elements. I will discuss the
way the late and great Charley Munger and Warren Buffett might discuss a
particular investment. (Both our clients and me personally own shares in
Berkshire Hathaway.)
Large Caps on the NYSE
Product producers
and marketeers are responsible for the bulk of large-cap volume. They are
fabricators who repackage raw materials into useable products. The better ones
have skills in both purchasing and selling. Currently, the overall stock market
view is that many of these product producing companies are in pre-recession
mode. New orders are falling behind current deliveries. The market reflects this,
with 77% of stock transactions on the NYSE executed on declining prices this past
week. By contrast, only 58% of the stocks traded on the NASDAQ were executed on
falling prices. In contrast to NYSE companies the NASDAQ has more
service-oriented companies, many of which are at an earlier part of their
cycle. Furthermore, many of these companies are led by their founders or other
entrepreneurs. Typically, Berkshire Hathaway buys companies with good
management and keeps them in place. Larger-cap companies rotate some of their
managers in training, hoping they will get useful experience at totally
managing an enterprise. This experience helps prepare them for similar
opportunities at the parent company. Even division heads often lack responsibility
for the full business.
Playing the Players
on the Fast Track
Each week the
American Association of Individual Investors (AAII) surveys a sample of their
members to get their outlook for the stock market over the next six months. In
earlier years I suspect the respondents were relatively conservative senior
citizens with meaningful portfolios. In some case they were active investors.
Having attended a
number of meetings with unidentified “wealth managers” trolling for clients. Professionals
pay attention to the weekly numbers for two reasons. The first is their belief in
the public always being late. (In truth the long-term record of the public is
pretty good, although they are weak at peaks and bottoms.) A second reason is that
some professionals want to hear from the “public” to catch the beginning of a
trend.
This week the
bullish members had a meaningful jump to 44.65%, after two weeks at 39%. Bearish
readings for the last three weeks were 25.7%, 33.0%, and 26.7%. Most of the time Munger
and Buffett buy into a declining price pattern over time.
Capital Utilization
Berkshire and a
small number of others have generated more capital than they can wisely use in
their operating businesses. Today it is more difficult to wisely put capital to
work due to the high prices of good properties, and short-term interest rates
in the 5.25% to 5.50% range.
What attracted their
investment in the past was a good manager looking to add a new aspect to their
business. Some of their recent investments in energy were this type of
investment. These investments did not result in increased capacity, they were preferably
a uniquely new project with a good margin when developed.
Business Economics
vs. GAAP Accounting
Evaluating what a
knowledgeable buyer would pay for a position in the marketplace. Long-term
potential earnings power at the bottom of an economic cycle vs correct
judgement of a fashionable product. As an example, for years car buyers were
attracted to the newest looking cars and during that phase car producers were
in the fashion business, particularly if they had creative advertising. This was
of no interest to the two leaders of Berkshire, who were more interested in
longer term control of critical supply chains. GAAP accounting was of no great
value in Real Estate and Pharma. In both cases, winning investments were not
what is present, but what they will be.
The Investment Game
is Changing
There are now a
large number of new CEOs and I expect an even larger number over the next five
years. Additionally, the structure of the investment sector is changing. For
example, Fidelity is attempting to get a fee from ETFs sold through Fidelity’s
brokerage desks. If they don’t get it from the ETFs they will likely attempt to
introduce a service charge paid by their accounts.
It is conceivable
that growth in the number of companies moving their headquarters and tax status
to Texas will result in substantial growth in listings at the newly formed
Texas Stock Exchange. This is already causing national accounting and law firms
to beef up or open Texas offices.
In the past, the
custodian function was considered a good business. But as this activity has become
concentrated in a few multi-national organizations, it has become difficult to
sell smaller custodian firms. When Ford Motor went public, the tombstone
included a very large number of brokerage firms. Most of those names have
disappeared, with some merging out while others just went out of business. We
have seen the same thing happening to regional stock exchanges, where very few
of the remaining exchanges have a trading floor. Instead, there are a computer
networks dominated by a few firms. When the next structural recession occurs, it
is my guess fewer organizations will be left in business. In the second quarter
of 2024, a number of brokerage firms, stock exchanges, and investment advisors are
losing revenue momentum.
P L E A S E S H A R E
Y O U R T H O U
G H T S
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Transactional Signals - Weekly Blog # 840
Mike
Lipper's Blog: Investment Markets are Fragmenting - Weekly Blog # 839
Mike
Lipper's Blog: The Rhyme Curse -Weekly Blog # 838
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.
No comments:
Post a Comment