Mike
Lipper’s Monday Morning Musings
What
We Should Have Been Watching?
Editors: Frank Harrison 1997-2018,
Hylton Phillips-Page 2018
Lessons from the racetrack and life
At any given time, humans tend to congregate around what is
most important to them or what is going to happen. These topics are labeled
favorites, both at the track and by psychologists. On any given day at the
track favorites win a minority of the races. More importantly, when favorites
win the payoffs are relatively small, as the winnings must be shared with a
large number who have reached the same conclusion. Thus, backing the favorite is a low return
game.
The problem in going with the less popular is their winning
ratio is lower, as most people bet on the favorites. Thus, in terms of
frequency, favorite betting wins.
There is a more rewarding goal, winning more money over time
with less frequency but higher returns. This is the choice I learned at the
track and apply to investing in securities.
This Week as an Example
Using the public media and limited public conversation, their
favorite investment topic was the speech by Fed Chair Jerome Powell at Woods
Hole, the implication of which was a cut in short-term interest rates. While most
investors believe these are probably the most important questions to be asked,
I believe there are more important questions with higher, longer-term
implications. These can be grouped under labels of concentration and valuation.
Concentration
Much has been written about the amount of money invested in seven
or ten largely technology/financial stocks. One study shows that the ten most
popular stocks in the S&P 500 represent 38% of the total value of the
entire index. On average, the ten largest market caps in the index between 1880
and 2010 represented only 24%. However, I question the math or source because railroads
represented 63% of the stock market in 1881.
This observation is of particular interest to me as a
graduate of Columbia College. Around 1880 Columbia had an endowment
account restricted to investment in the most secure stocks. You guessed it, lawyers
restricted the investments to railroads!! This particular endowment was to be
spent on bricks for the campus. Thus, for many years all of Columbia’s
buildings were brick faced.
There were many important implications that should have been
drawn from this case, especially since every single railroad went into
bankruptcy years later. However, if you had included political analysis along with
legal analysis it was obvious railroads had become too powerful in the country.
In terms of political analysis and understanding how the US
works politically, people should read a new 856-page book written by Bruce
Ellig, a good friend of ours. The title of the book is “What You Should Know
about the 47 US Presidents”. The book devotes a chapter to each President, covering
the most important laws and regulations of his term. Included in the book is information
about the President’s life and personal activities.
Valuations
John Auters of Bloomberg believes “valuations are extreme”. Prices
in terms of sales, earnings, book value, and dividends are at a stretching
point. In a recent survey of intuitional managers, 91% believe the US market is
overvalued and 49% believe emerging markets are undervalued. Some 60 years ago
I worked for a research-director who believed shipments of boxes were a good
economic indicator. They probably still are, and that is why I took notice that
they were down -5% in the second quarter.
With the federal government pushing to let retail investors
participate in private capital transactions, particularly private equity, the
health of the market for these longer-term, illiquid investments, could impact
the listed market. There are approximately 3100 positions in private capital
firms that are unsold. Their retail owners may not see the level of
distributions they were expecting, which could unfortunately increase the
volume of listed securities to be sold.
Long-Term Horizons:
In the long run
equity investing can generate very attractive returns. A dollar invested in the
1870 equity market by the 25th of July would be worth $32,240 in nominal
dollars before taxes this year.
As often said,
history does not repeat but often rhymes. There are a number of parallels with
the market crash of August 1929 to November 1936, and the economic depression that
followed from February 1937 to February 1945, which will be discussed in
upcoming blogs.
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: The Week That Wasn't - Weekly Blog # 902
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Lipper's Blog: DIFFERENT IMPLICATIONS: DATA VS. TEXT - Weekly Blog # 901
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Lipper's Blog: Rising Risk Focus - Weekly Blog # 900
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