Mike Lipper’s Monday Morning Musings
Slow Moving in a Fog
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Weather Predictor’s Real Function
One should pity the role of weather predictors who must often predict changes in the weather, either by hour, day, week, month, or year. One or more of their outputs are frequently wrong because something changes. As a professional chartered financial analyst (CFA) I am both grateful and sympathetic to their plight.
The only thing they can be confident of is making securities
analysts look good, having a somewhat worse prediction record than the analysts.
The primary reason they are wrong is that something changes. As both surviving
analysts and politicians are prone to say, when the facts change, my views
change.
To safeguard my self-confidence, I rely on a weather
condition. A fog has descended on the economic and securities playing fields.
We will be in such a situation this week and looking forward to the future.
Since managing and owning a portfolio, “facts/sentiments” change every minute,
hour, day, week, month, or year. It is more like navigating a vessel than a
piece of statutory. Dangerous risks in a fog are unidentified shoals or obstacles,
as well as warning elements which occur randomly.
Friendly Signals
- Many Chinese believe that 888 is a lucky sign of the future.
- The American Association of Individual Investors (AAII) latest weekly sample survey showed a decline in bearish readings and an increase in bullish readings.
- 54% of the weekly readings of the prices of indices, currencies, commodities, and ETFs in the WSJ were higher.
- Unusual trading volume on Friday was the highest of the week.
Warning Signals
- The Financial Times noted that “Institutional Money Managers are trimming US exposure...”
- The US Federal Government is expected to cut-back “Watchdogs at the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency and the Securities and Exchange Commission.” (Beneath the surface, there appears to be concerns about the soundness of small banks and private debt instruments.)
Mixed Messages
When a stock price drops about 1% following a corporate
announcement after it was expected to rise, either the expectation was wrong,
or some didn’t understand the message. This is particularly true when the stock
and announcer are both among the best practical educators in the investment
world. I am referring to the drop in the price of Berkshire Hathaway* after
Warren Buffett announced his intention to ask the Board to approve his resignation
as CEO, effective year-end.
*Berkshire Hathaway is held in both client and personal
accounts and is the largest holding in some of the later accounts.
Warren Buffett has said for years that the stock price would
likely rise after he retired, and I shared his views for a couple of reasons.
First, his retirement would eventually happen and second that he was running
the company for the heirs of the shareholders. With that in mind, he ran the company
in a low-risk fashion. In many, but not all ways, Berkshire was a trust account
for the shareholders’ heirs.
His long-term friend and vice-chair, the late Charlie Munger,
taught him not to buy cheap stocks on a price basis, but good companies at fair
prices. Charlie called Warren a learning machine because he learned every day, particularly
from losses. This reinforced the teaching of Professor David Dodd at Columbia,
who taught the Securities Analysis course based on his experience in the
Depression. This was perfectly appropriate for the times, and he was still
focused that way in the mid-1950s when I took his course.
The course was essentially an accounting course using
financial statements. It took me a number of years to learn the other key
lesson, the business analysis of the issuer. This knowledge was one of Charlie
Munger’s contributions to Warren. After Charlie passed a few days before his
hundredth birthday, the likelihood of Warren’s own retirement became more
likely.
His retirement became possible with the appointment of Greg
Able, who is much more of an operating manager than a securities manager, which
Berkshire neglected in my opinion. Recent sellers of the stock were likely
worshipers of “Mr. Buffett” or possibly the heirs of long-term holders who now felt
free to capture the assets for their own needs rather than wait for the passing
of their relatives. They have probably never read anything about Berkshire’s
investment thinking. Thus, I do not believe they are informed sellers.
How do you see things?
Did you miss my blog last week? Click here to read.
Mike
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