Mike Lipper’s Monday Morning Musings
Confessions & Confusion of a “Numbers Nerd”
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Numbers Tell The Story
My education at
Columbia University, the USMC, and taking the CFA taught me that numbers tell the
story. My brother and I created a company that sold mutual fund data for some
of the largest fund organizations in the world. The problem is it was the
wrong story. I fell into a trap common on the numbers loving Wall Street. The trap is using numbers as a tool for many applications
for which they were not intended.
The original sin was using the changing price level to make
investment decisions, +10% or -8%. This leads to being happy with +10% and
unhappy with -8%. Raw numbers can be misleading, until you understand the usage
of numbers and their appropriate comparison.
Early in my career I called on the partner and treasurer of a
management company who informed me he didn’t need our service because he had found
something better. I asked to see this remarkable comparison. He showed the
performance of all funds, regardless of mission, in his city! He was using the
hometown comparison to set the wages of his workers. (Luckily, an outside
lawyer working with the independent fund directors immediately recognized that
what I was peddling would be essential for the directors.)
This experience brought home that there were at least two
different needs in the same shop. The treasurer had an operational need to gage
the competitive availability of labor needed for the fund’s work, while the
lawyer wanted the directors to know how each of their funds were doing
competitively.
Numbers in the right context are critical. An example of
this is the +10% -8% example. The +10% is quite poor in a league averaging +20%,
with the best at +30%. The -8% could be superior when the competitive average is
-20% and the worst fund is down -30%.
Some psychologists believe losses are twice as painful as the
pleasure of gains of similar magnitude. This probably averages out, with losses
happening in one of four years in the US, but more frequently in other
countries. I believe this pain level should also be addressed in terms of age.
The older the individual, the less time they have to fully recover. Many of us
rely on gains from investments that have been successful in the past, and our
faith in them builds over time, so when they fail it is more destructive.
This is one of many reasons that relatively little money
flowed into SEC registered “China Funds” this week, even though 13 of them were
in the 25 best performing mutual funds. Small-caps pulled ahead of mid-caps for
the week, which had performed better this year.
Before treating the above as purchase suggestions, I quote
from Jaime Dimon “Past Performance is not indictive of future results.”
However, I regularly look at investments that have done poorly for a long
period of time.
Current Environment
Most democracies are unpopular and are favored by a
decreasing number of supporters. Even in the US the Ex-President won a narrow
victory, benefitting from a significant number of non-voting Americans.
With long-term productivity adjusted for inflation, higher than
normal interest rates, a decline in the dollar, the near-term
outlook is not good. This is perhaps the reason many smart companies are laying
people off.
Please share your views with me, particularly when you feel I
am wrong. I need your help.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: It Doesn’t Feel Like a Bull Market - Weekly Blog # 866
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Lipper's Blog: Professional Worry Time vs Amateurs’ - Weekly Blog # 865
Mike
Lipper's Blog: SPORTS FANS SELECT CABINET & OTHER PROBLEMS - Weekly Blog #
864
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