Mike Lipper’s Monday Morning Musings
Roundtable Discussion
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
We at Lipper Advisory Services feel a deep duty to all of
our clients and those for whom we have an investment responsibility. I’m currently
taking advantage of a visit from my son Steve to collaborate and will be
working with Steve and Hylton to produce this week’s blog. Most money invested
in the United States and many other countries is for long-term purposes. While
the media focusses on short term results, we tend to look long-term and only
use short-term inputs if it helps in making long-term decisions.
One of the critical determinants of investment results is the size and nature
of the population. Recently, the Congressional Budget Office issued a long-term
forecast on the size of the population that was lower than prior forecasts. This
is very important but it is only one of several critical forces that will
produce results. One of my concerns is that most populations will shrink and
only a few countries will enjoy future population growth. The real force that
will drive investment results will be the thinking of not only investment
professionals but also of investors.
In this light I am personally very concerned that most educational systems operating
in the world are producing poor results in terms of preparing people to
produce adequate lifetime savings. These issues start from pre-K through PhD
education. This issue is especially important because most people generate the
bulk of their savings through their work efforts.
I think that there will be some tremendous investment
opportunities over the next ten years but wonder how the median member of
the population will do. My concern is that few will be prepared with the
necessary thinking, savings and discipline to identify and take advantage of
these opportunities.
My path as an investor
To the extent that I have done reasonably well as an
investor, it’s because I have stayed within a zone that I understand reasonably
well. Warren Buffet calls this a “circle of competence”. I tend to focus on
areas that other people are not focused on. However, there’s a challenge in
that most of the areas not being followed actively are currently unattractive
investment opportunities. An investor needs to bring something else to identify
real opportunities. They need some in-depth understanding of the reality of the
underlying business. That being said, it’s possible some opportunities will be
in securities markets and countries I have not had direct experience with.
I hope that Hylton and Steve will share what they are
thinking about concerning these issues. It will be a source of future
guidance.
Steven Lipper
I agree that both demographics and education are important
factors for long term investors to consider. My father has trained me well as a
contrarian thinker. I think demographics running in the opposite direction of
the typical view is an important issue for equity investors. It’s inarguable
that a country’s long term economic grow is tied to its population growth (more
precisely, to total hours worked, but that’s another topic).
But as equity investors we are not buying future economic
growth we are buying future profit growth. There’s a counter-intuitive
dynamic I’ve seen as a small company investor. When there’s a shortage of labor
business owners invest more in productivity enhancing processes and equipment.
They are forced to do this in order to meet rising orders with a flat
employment base. And that increased productivity often increases profits,
stocks prices, and workers income. So, as an equity investor I am not
pessimistic about the lower projected growth rate of many countries’
populations. Differences in results will come from how countries incentivize
investment.
With regard to education there’s much to say but let me
focus on the investment implications and opportunities resulting from disappointments
in our education system. I expect that for most people post-secondary
“education” will evolve to having a greater focus on certification. By
certification I mean learnable skills which are in demand by employers and can
be verified through testing. These certifications, if awarded by respected
organizations, are valuable signals that employers can use to reduce risk in
the hiring process.
Certifications also benefit from the dynamism of market
forces as in-demand skills will translate to in-demand certifications,
providing signals to people to add those certifications. The expanding pool of
people with in-demand skills will in turn support companies’ growth and
people’s opportunities. I also expect on-line certifications to be less
prone to many of the scandals of on-line colleges, as there will be a clear
standard and a faster feedback loop. Some investment opportunities should
be available for innovators in this area.
Hylton Phillips-Page
Sadly, young people today save very little. Reasons for the
lack of savings range from simply being unable to make ends meet to a sense of
entitlement for a certain lifestyle. We live in a world where the pace of
technological change is both exciting and terrifying at the same time.
Technology will allow us to solve many of life’s problems but will also cause
significant dislocations in society as robots and automation replace many human
functions. Those jobs will likely be replaced by different types of jobs, as
they have in the past. Keeping abreast of the opportunities and the skills
needed for them is perhaps the best advice we can give to young people
preparing for the workplace. This is a time where savings would be helpful, as young
people will need all the help they can get in preparing for a future which requires
an ever-changing skill set.
For those with investable cash it could be an exciting
opportunity to invest in those companies leading the change. We are at a major
inflection point in history, similar to the industrial revolution or the
introduction of the internet. Artificial intelligence (AI) and robotics will
significantly improve productivity and change the way we approach solving these
problems. They will of course improve corporate profits too. Quantum computing
is at an early stage of development, promising to solve problems in a fraction
of the time it takes today. Increased energy needs will be at the center of it
all, as (AI) requires as much as five times the energy of a search not using
AI. Last but not least, we have a new political administration promising to
reduce regulation and speed up the investment and development process. So,
there are a number of force multipliers all occurring at roughly the same time.
However, you should be aware of the challenges of investing in
technology stocks.
- One of the biggest challenges is an even better technology coming along and making your technology obsolete.
- The technology could fail to live up to expectations.
- There is often a first mover advantage that makes it difficult for others to follow.
- There are a number of very large and well-funded technology companies that have the resources to be in any business they desire by investing. They will likely have more money and resources to invest than small start-ups. If all else fails, they often buy out the competition.
The dominant performance of the “magnificent seven” is
perhaps symptomatic of this change occurring in the market today. However,
there are also many smaller companies embracing new technologies and they are
likely to emerge as leaders in the future. Successful investing requires
keeping abreast of the companies best adapting to the future. Professional
portfolio managers and research analysts are in the best position to identify
them.
Did you miss my blog last week? Click here to read.
Mike
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