Investors Not Traders Are Worried - Weekly Blog # 856

 

Mike Lipper’s Monday Morning Musings

 

Investors, Not Traders, Are Worried

 

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

Investors are concerned that their US dollar capital could be insufficient to completely fulfill their important responsibilities. Not all their concerns will be successfully addressed, many of them will likely continue to be problems for capital owners and beneficiaries. A short list of the visible problems follows in no particular order:

1. The number of voluntary and non-voluntary retirees is growing in many developed western countries. They are growing faster than the number of workers eliminated by “AI’s” future impact. In the US today there are four workers for every retiree. It used to be nine.
2. The American privilege of having the most valuable currency is fading. One Presidential candidate wishes for a lower value, while both advocate for disguised inflation that will reduce the value of US currency. This will lead to higher interest rates on debt sold to overseas buyers.
3. One of the ways the wealthy protect themselves is by reducing cash holdings in favor of investing in various forms of art. “The Art Market Is Tanking” according to WSJ’s front-page article on auction prices and volumes.
4. Increasingly, investors and corporations are using exports and foreign investments to escape local regulations and taxes. Globally, 128,000 millionaires plan to move their domicile in 2024.
5. The Fed’s reduction in interest rates is unlikely to lead to a “soft-landing”, unless fresh capital is invested in plant/equipment.
6. Forty three percent of the stocks in the Russell 2000 are unprofitable. Unless the contemplated government grants to new start-ups is run by the SBA or a similar agency, it will lead to large scale losses of family and friends’ capital.
7. The CFA Institute conducted a survey of 4000 CFAs regarding their current view of the market/economy. The findings which will be published shortly are distinctly negative in terms of their outlook. (CFAs earn their designation by passing three rigorous academic type exams. It is worth considering that 4000 CFAs responded to the questions, compared to roughly 1000 in various WSJ and other polls. While there are a number of CFAs that work for brokerage/investment bankers and hedge funds, I guess over half the poll participants work for financial institutions. Most of their clients are more long-term oriented than the clients of many brokers, investment bankers, and hedge funds.)

                                                                                             

Hopefully these views will raise questions and disagreements that subscribers can share with me.  

 

 

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Mike Lipper's Blog: Many Quite Different Markets are in “The Market” - Weekly Blog # 855

Mike Lipper's Blog: Implications from 2 different markets - Weekly Blog # 854

Mike Lipper's Blog: Investors Focus on the Wrong Elements - Weekly Blog # 853

 

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Many Quite Different Markets are in “The Market” - Weekly Blog # 855

 

Mike Lipper’s Monday Morning Musings

 

Many Quite Different Markets are in “The Market”

 

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

Main Motivations

No one invests to lose money, even if there is a clear chance of loss due to a decline in prices, inflation, or currency values impacting spending. To reduce the odds of disappointment one can diversify, which in theory reduces the risk of a total wipe out. (Except from a large meteor or similar tragedy.)

 

As the potential number of investments is so large, most people choose to narrow the list down to a manageable number. Very few people make the choice of investing in their own work, which could produce the highest lifetime return on work.

 

For the most part, diverse investments are packaged by marketing agents to make choosing easier and generate a profit for the marketer and her/his organization. To make their job easier during their limited selling time, they wrap their sales pitches with labels. The three most popular labels in the fund world are Growth, Core, and Value. Investments are not labeled by the issuer or the marketplace where traded. Although the distribution and administration processes are significant, they are governed by economics. (If one can sell the same product many times, the marketing and administration cost per sale can be smaller than the distribution/administrative cost for selling only once.)

 

The main motivation for investors, after making money, can be summed up under two categories. Excitement & Entertainment and Generating Capital/Income for future spending. Many traders interested in the first category judge the market by following the Dow Jones Industrial Average (DJIA), along with the volatility of the Nasdaq Composite Index. Serious investors attempting to earn capital and income over extended periods focus more on the Standard & Poor’s 500 Index (S&P 500).

 

The biggest risk in owning any security is not the issuer or its traded market, but the risk created by one’s co-venturers. If a large enough number of investors panic, they can pierce a chart’s support levels and bring on more selling, which could bring on even more selling. If the stock is critical to the forward momentum of the market, the price action could end the current phase of the market.

 

Understanding Data

It is critical to understand how large-cap funds perform, because they not only have the largest earnings in the fund business, but in aggregate probably represent the largest allocation of investors’ money. (Large-Caps represent at least 80% of the general equity in stocks.) Excluding sector funds and global/international funds, large-cap funds represent 33% of assets invested in mutual funds, with growth funds accounting for $1.55 trillion, core funds $1.09 trillion and value funds $0.66 trillion. When I created fund measurement data, I found it useful to look at the totals three ways; weighted, average, and median. The resulting numbers are meaningfully different. Growth funds year-to-date to September 19th show a weighted average return of +17.79%, an average return of +14.61%, and a median return of +13.48%, for a spread of 4.31%. In the small-cap peer group the spread was only 0.54%, showing the impact of size on the results.

 

Impact of Universes

Through the end of the latest week the volume of shares traded for the year was up +12% for the NYSE and 31% for the NASDAQ. In terms of advances/declines, 69% of NYSE stocks rose while 59% rose on the NASDAQ.

 

Hunting Grounds

I was trained to look for badly performing stocks that might be big future winners. In looking at poorly performing fund sectors two sectors caught my attention, China Region and Dedicated Shorts. Both have produced five-years of loses.

 

It has also been useful to reduce commitments when a sector is changing its source of new capital. Private Equity funds are now growing in popularity with the retail crowd of advisors and their customers.

 

Conclusions:

Be careful, many investments are likely much closer to their next five-year’s highs than their five-year lows.

 

 

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Mike Lipper's Blog: Implications from 2 different markets - Weekly Blog # 854

Mike Lipper's Blog: Investors Focus on the Wrong Elements - Weekly Blog # 853

Mike Lipper's Blog: Lessons From Warren Buffett - Weekly Blog # 852

 

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Implications from 2 different markets - Weekly Blog # 854

 

Mike Lipper’s Monday Morning Musings

 

Implications from 2 different markets

 

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

 

 

 

On balance the New York Stock Exchange (NYSE) and NASDAQ stocks serve very different investors, as they have different outlooks and current performances. The “Big Board” stocks tend to be older, larger capitalization, have greater media exposure and get more attention from Washington. They are likely to populate brokerage accounts managed or influenced by former commission generators who have since converted to being fee paid advisors. The NYSE also services institutional accounts with substantial capital with limited research and trading professionals, which generally appeals to older clients.

 

Those in Washington and “news” rooms may not be aware that the NASDAQ is home to 4627 stocks vs 2903 for the NYSE, as of this week. In recent years the NASDAQ composite has materially outperformed the NYSE stocks, often identified as the 30 stocks in the Dow Jones Industrial Average (DJIA).

 

NASDAQ stocks are often more volatile than those traded on the NYSE, because they are smaller and have fewer liquidity providers. This may be the reason why those without trading experience shy away, resulting in more block trades and 3-5 times more NASDAQ volume.

 

Many people confuse the NASDAQ with its Over The Counter (OTC) origin. The NASDAQ is a regulated stock exchange, distinct from the OTC market which is held together by the pink and yellow sheets publishing the competing bid and asked spreads of competing dealers. Since its earlier days, important constituents of the NASDAQ have consisted of local companies, medium size banks, and some foreign stocks.

 

While the NYSE focused on its regulatory responsibilities, the NASDAQ grew through an extensive marketing effort. This marketing effort happened at a time when a large number of what we now call “Tech Companies” were looking to find a trading home. These tech companies joined the NASDAQ exchange, attracting younger, more aggressive, professional investors and traders.

 

Implications

Trying to determine the future is impossible, but military intelligence (an oxymoronic term) attempts to do this by gathering separate elements of information to see if they provide a pathway to one of many futures. This is the approach I take in thinking about the future. While most pundits focus on present price relations, I don’t find them particularly useful. We need to guess what future prices will be for specific future periods.

 

In the short run the following inputs may be relevant:

1. This week’s high/low prices were 548/168 for the NYSE vs 411/393 for the NASDAQ (Enthusiasm/Caution)
2. Friday’s percentage of advances were 85% for the NYSE vs 68% for the NASDAQ (Winners are less happy)
3. The weekly AAII bearish sentiment increased to 31% from 25% the prior week.
4. Financial Services shorts as a percentage of float saw Franklin Resources* at 8.5%, FactSet at 6.0%, T. Rowe Price* at 4.6%, Raymond James* at 4.2%, Regional Financial at 4.1%, and the sector at 1.9%. (*held in personal accounts, unhappy          near-term)
5. Ruth’s indicator, the size of the Vogue September issue, is the biggest month for high fashion advertising, perhaps like the lipstick indicator. (The closing of Western shops in China is further proof of the expected global recession, or worse.)

 

Longer-Term Indicators

1. The White House is preparing to introduce a Corporate Alternative Minimum Tax (CAMT) of 15%, which is unlikely to pass the next Congress.
2. Both Presidential candidates are pro inflation in action, if not in words.
3. A front-page WSJ article titled “As Berkshire Hathaway* Rallies, Its Looking Too Rich to Some”, is an example of poor research. Warren Buffett has repeatably stated that he is not running the company for the present shareholders, but for their heirs, which is far beyond his 93 years. To my mind, the GAAP published numbers are misleading considering the SEC’s regulations. The value of a stock is an elusive intrinsic number. The most difficult part is the private value or current price of the 60 odd companies Berkshire owns, which are carried at purchase price plus dividends paid to Berkshire. To the right buyer, the aggregate eventual price for these companies is worth a multiple of their carrying value. (“Intrinsic Value” was a concept that I learned from Professor David Dodd, who authored “Security Analysis” with Ben Graham. This is probably the reason I and some of my accounts own the stock. We own the stock for its eventual value to our family.)
4. The world is in stages of a slowdown or a recession, with both the US and China suffering. Always treating China as an adversary inhibits our access to the Chinese market and their skills, preventing us from reaching our potential. (I don’t have a suggestion on how to conduct this rescue effort. It is like training a dangerous animal).                                                                                                                                         

 

Conclusions:

There will always be bear markets, which often precede recessions and infrequent depressions. Since we haven’t had a recession in a long time, one is likely coming. Particularly considering the political class’s stock optioned business management and the gift of a highly valued dollar compared to other deficit currencies.

 

The key question at the moment is when we will see the next INCREASE in INTEREST RATES and INCOME TAX RATES, which the Fed will follow.

 

Key Question: What is Your Bet as to When?

 

 

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Mike Lipper's Blog: Investors Focus on the Wrong Elements - Weekly Blog # 853

Mike Lipper's Blog: Lessons From Warren Buffett - Weekly Blog # 852

Mike Lipper's Blog: Understand Numbers Before Using - Weekly Blog # 851

 

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Investors Focus on the Wrong Elements - Weekly Blog # 853

 

Mike Lipper’s Monday Morning Musings

 

Investors Focus on the Wrong Elements

 

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

 

 

 

Combing Mr. Buffett with Albert Einstein

Compound interest, the eighth wonder of the world, is wrongly attributed to Einstein according to the people at Caltech. Nevertheless, Warren Buffet stated, “He who understands it (compound interest) earns it. He who doesn’t pays it.” The better long-term investor understands it and uses it in drawing up his/her long-term strategy.

 

I have tended to use a long-term lens in my lifetime focus on mutual funds. My particular focus is the long-term, the ten-year record of the average performance of 30 equity fund indices for the last 10 years through August. Of the 30 only 7 had double digit returns, the highest being Health/Biotech which rose 15.67%. I also looked at the 25 largest stock mutual funds for 5 years, 17 of which produced double digit returns, with only one reaching the twenty percent level. It was Invesco QQQ Trust, which gained 21.30%.

 

This research reminds me of one pension plan a number of years ago which sold all its equities when the portfolio was up 20%. It was one of the best performing pension funds. Strange for me considering my background to suggest that superior performance could well be a signal to reduce investment. I say this knowing that every few years there is a period when one or more funds gain 100%. Strangely, none of these wonders makes the best performing list for the five or ten-year period.

The Media and Frequent Statements by Pundits

Traditionally, media outlets get more attention when the news is bad.   However, in covering the market and economy there is much space devoted to “happy news”. What seems particularly true is headline editors, correspondents, and allocators of space/minutes seem to share a single political view. It is occasionally worth reading to the end of an article where the other point of view gets some exposure. Operating margins for news distributors are under pressure, which has led to surveys where the number of people polled is only between 1,000 and 1,500. This might be okay, except that many people on the right don’t trust polls and media related agencies and thus do not participate in polls, often causing the prediction of incorrect election results.

 

What Should We Be Following

• Unlike the current situation in the US, many nations are seeing younger people move up. This is particularly true in the Middle East, Africa, and Asia.
• China is exporting surplus steel, which amounts to half of what they produce
• Our Presidential election on both sides exaggerates
• their commitment to integrity
• The pouring of money into small company start-ups will curtail the future of small business capital formation. The odds of repaying these loans and other bribes will probably be similar to the repayment of student debts. The unstated purpose of these programs is to hurt the families and friends of the would-be entrepreneur.

 

What elements are you watching to help make decisions about the two apparently unrelated games, equity markets and economy? How will global problems impact them?

 

 

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

Mike Lipper's Blog: Lessons From Warren Buffett - Weekly Blog # 852

Mike Lipper's Blog: Understand Numbers Before Using - Weekly Blog # 851

Mike Lipper's Blog: The Strategic Art of Strategic Selling - Weekly Blog # 850

 

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A. Michael Lipper, CFA

 

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Lessons From Warren Buffett - Weekly Blog # 852

 

         

Mike Lipper’s Monday Morning Musings

 

Lessons From Warren Buffett

 

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

 

 (Many subscribers will receive this blog on the regular Monday schedule, but some distributors are taking Monday off, so you may not see this blog until Tuesday.)

 

 

As Often the Case, Media and Other Pundits Missed the Opportunity to Learn 

The August 29th New York Times headline stated, “Berkshire Hathaway Hits $1Trillion in Market Value”. However, the headline was essentially a current events piece, which missed an opportunity to plum Mr. Buffett’s actions. In so doing, they learned no lessons from his current and historic activities derived from an extremely successful professional investment career. 

 

Caution: Bias at Work 

Berkshire Hathaway is the largest position in my personal accounts. Perhaps more significantly, I share a responsibility with Mr. Buffett, I manage money for personal accounts. We are not managing money for our own benefit, but for our heirs. In my case, it begins with starting to care about the fourth generation. 

 

This orientation leads to largely investing strategically, which means positions are permanent unless conditions change materially. This desire separates Mr. Buffett and me from most professional/individual investors who are more focused on tactical approaches. Most investors react to sell signals, while we focus on disappointments as a need to re-underwrite. We hope to add to our holdings at cheaper prices while extending our holding period. 

 

Strategic Diversification 

Changes occur at different times for different opportunities, making it wise to take advantage of changes with different tools. While Buffet is always looking for lasting value, he has found a way to take advantage of these situations with different tools.

  

Berkshire was initially mostly a buyer of cheap stocks selling below book value, which worked reasonably well coming out of the depression. The focus changed to buying good companies at fair prices when Charley Munger came on the scene. As fairly priced securities became scarce and Berkshire’s assets grew, cheap assets were to be found in the private assets of whole companies. After a few mistakes they learned how to pick winners.

 

For many years the wholly owned companies were larger than the publicly owned and publicly traded companies. Within this collection of companies there were a few insurance companies, including GEICO and other casualty insurance companies. The primary attractiveness of these companies was “the float”, allowing for the use of client cash before it was needed to meet claims. The insurance assets grew, and they hired very talented people to underwrite very large risks. Most casualty insurers were risk adverse, but Berkshire looked at insurance risks as opportunities at very high rates. On balance the rates were larger than the risks, which allowed for large, long-term “floats”. The final, or perhaps the first type of asset was cash. 

 

Cash, the Intermediate Asset 

Most investors treat cash as the ultimate reserve asset, but not Warren Buffett. After segregating Berkshire’s $100 billion in US Treasuries, he devoted the remaining cash pile to acquisitions. Buffet recently sold 50% of his Apple stock and enough of his Bank of America stock to drive it below 5% of its outstanding stock value. He did not buy any of his own stock with the proceeds. (I suspect he has converted more of his assets to cash.) 

 

I have stated that these moves are the most “bullish” indicators I have seen. I don’t know whether this cash will be used for the acquisition of a private company or a publicly traded stock. I have been told he has made some offers, but he has been outbid. When the market breaks, his cash will become more valuable. 

 

Some other Buffet lessons are useful in building a picture of how his mind works: 

• Losing is part of winning 
• Cash is not king 
• It is okay to change 
• Buy businesses, not CEOs 
• Don’t buy art as an investment, buy it for pleasure 
• There is no such thing as growth or value stocks as Wall Street generally portrays as contrasting asset classes. Growth stock is part of the value equation. 

 

 

Question: Are you utilizing any of Buffett’s lessons? Which do you disagree with? 

 

 

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

Mike Lipper's Blog: Understand Numbers Before Using - Weekly Blog # 851

Mike Lipper's Blog: The Strategic Art of Strategic Selling - Weekly Blog # 850

Mike Lipper's Blog: Investment Second Derivative: Motivation - Weekly Blog # 849

 

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Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.