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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