Mike Lipper’s Monday Morning Musings
Premature: Buying Program to Begin Soon?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Basic Investment Principle
Investment opportunities are cyclical in both timing and
magnitude. Larger gains are achieved after periods of extended declines. Since
one does not know the extent of a decline or magnitude, it is wise to use a
buying program. For instance, invest no more than 10% of buying reserves at any
time. (This assumes you establish a buying reserve in rising markets. Charlie
Munger has taught us to buy good companies at fair prices rather than always
look for “cheap” prices.
Recently, my sister-in-law sent me a copy of a letter from
my grandfather to my late brother sometime after he left the Marine Corps to
begin his life in the investment business in the mid-1950s. My grandfather, who
built his own brokerage firm for more than thirty years, cautioned my brother to
always expect periodic recessions and less frequent depressions. He also
advised him to not invest against the US, as the country was rich in natural
resources. (This is still good advice, but there are times when our government makes
our currency risky for a period.)
Where are We?
Most investors in defining where we are, do so by looking at
where we have come from. The pundits wax poetic about recent data
extrapolations, expecting the past to be repeated. My analytical training at
the New York racetracks and as a US Marines Corp Officer was to always examine
the current situation and expect some change.
Today, many pundits and politicians see an improving
picture. As a student of financial history, I am conscious that it has been some
time since the last recession. Furthermore, it has been 97 years since the Wall
Street crash and the 12-year depression. Few people recognize any similarity between
that time and our current condition.
Trading Alerts-Correction, Recession, or Depression?
The following are a number of alerts from last week suggesting
we are entering a period of more declines than increases:
- Morgan Stanley is planning to cut 3% of its customer-facing workers.
- 73% of stocks traded down on the NYSE and 67% on the NASDAQ. A pattern which has been going on for several weeks.
- The ECRI industrial price index rose to 126%, a 4.73% gain year over year. Clearly, the war in the mid-east is inflationary. 85% of prices tracked by the Wall Street Journal each weekend declined, echoing the ECRI results
- Individual investors and those serving retail investors are not confident in their outlook for the next 6 months. 33.1% are bullish and 35.5% bearish.
- The S&P 500 index is the best indicator of the market for both institutional investors and wealthy investors. Along with most other indices, the S&P 500 index fell on Friday. If this was the beginning of a recession and the index were to decline to where its rise began, it would drop 28%. If this was the beginning of a relatively mild depression, the drop could be 49%.
Advice to Buy Program Buyers
I have found it extremely difficult to buy at the exact
bottom, as most declines don’t appear convincing enough. The advantage of using
a buy program strategy instead of a one-shot purchase is that you will likely
have a collection of winners and losers before the overall market has reached
back to its original starting point, assuming you buy 10% each month or quarter.
However, that is not the point of the exercise. You should want to hold your
position until it has reached the condition of a great company at too high a
price, where some trimming makes sense.
Please share your thoughts with us.
Did you miss my blog last week? Click here to read.
Mike
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