Watch Out for the Four - Weekly Blog # 938

 

 

Mike Lipper’s Monday Morning Musings

 

Watch Out for the Four

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

          

 

Preface

As subscribers have been told, I am shifting my focus to investing for long-term gains, hopefully for multiple generations. This is the time to begin searching for future winners, although it’s not the time to begin serious buying. If you are like me, at times it can be difficult to only follow an investment intellectually. I need to own a small amount so that I go through all the relevant info while awaiting the time to begin a meaningful buy program.

 

Timing May Not Begin Until:

The beginning of the buy program will not start until people and the data change. In terms of people, there are four structural leaders. These are the men who wish to change the future and are governing to do that. They lead and largely dictate activities in the US, China, Russia, and North Korea. Only the last one, North Korea, is preparing to eventually pass the torch of control to a very young daughter. In each case the eventual leader will be different than the present leader and will have to exert power to stay in place. Any of these replacements could have input into future global investments. Because of the similar ages of the first three, investors will be faced with cross currents that will make choosing investment policy difficult.

 

Before these leadership transitions occur, the global economy is likely to change multiple times. I expect we will be dealing with the terrible “4s”* at least some of the time. The data series likely to experience major swings are inflation, currencies, and taxes, among others. Changes to these data series may not be dictated from on high, but in the marketplace. Additionally, secular changes in demographics and technology will have an impact on how people act and feel.

*Terrible 4s are 4% for inflation, unemployment, and dollar decline, leading to an S&P 500 price that starts with a “4”. A high 4 signals a recession and a low 4 a depression.

 

What Can We Do Now?

First, we can pay attention to what people are doing, not saying. Actions speak louder than words. While the media is full of pundits talking about market indices at new highs, 58% of the stocks on the New York Stock Exchange (NYSE) fell in the latest week. Perhaps more meaningful, 56% of the stocks fell on the NASDAQ. A survey of investment advisers and their clients found advisers twice as bullish as their customers.

 

Second, be aware of financial and economic history. We know that historic patterns don’t exactly repeat, but directionally they are pretty accurate. Economic cycles are based in part on the level of debt being created throughout the system. (Government deficits need to be considered as well as business debt, personal debt, and accidental debt.)

 

When debt repayment becomes too burdensome it won’t be promptly repaid and will cause purchasing power to drop and fixed income/equity markets to decline. Depending on the severity of the decline it will be called a recession or a depression. The frequency of recessions is normally five to ten years, suggesting one is due. A depression is much more serious and infrequent, usually every fifty to one hundred years. Depressions are often caused by mismanagement of an economy in a recession. We have not had a depression for ninety years and some believe the last one brought on WWII. The key for us is knowing that these occurrences are possible and being aware and ready to change behavior.

 

While Waiting

The present should be devoted to looking for stocks to buy for the next expansion. A study of the past suggests the leaders of the next cycle will be quite different than the present. Bearing in mind that many children born today will need retirement money 100 years from now, the odds of most large companies surviving is not good.

 

There are lots of ways to choose stocks to research. None of them are perfect and they will change over time, so investors should always be learning what will cause change. From time to time, I’ll pick one approach to explore briefly, so keep tuned to find an approach that helps you.

 

Acquisitions

No solution is perfect, and conditions change unpredictably. It is normal to change our choices after looking at the cards we are given. The easiest approach is to add a new holding and temporarily retire a present holding. Additionally, no one plays the investment game without making periodic acquisitions. Unfortunately, many investors fail to discard some part of what is not working. This habit of adding without discarding leads to an ever-increasing number of acquisitions, which in most cases leads to average and eventually below average results.

 

I have never seen an acquirer who couldn’t benefit from getting more talent, often with different characteristics than their existing talent. I have often found it better to buy a company for management and tax purposes, even if it’s for a single individual. It has worked for me, even when it was a bad choice. It is easier for me to make a bad choice than to fire an individual or a small group who I like as people, but not as workers and co-venturers. I am comfortable with the way Apple often buys tiny companies, compared to others who acquire much larger companies with all sorts of personnel problems.

 

I was speaking with the manager of a small unit in a very large company who wanted the unit to grow by hiring more people doing the same thing his present employees do. That may be efficient in terms of output, but it just adds to existing problems. I would not view this situation as growth but view it as adding new machines. If on the other hand the new people brought new talents, they could serve a different group of clients who had different needs, which is real growth.

 

There are some companies who try to grow by buying distant operations, adding resources outside their prime geographical area. I do not view this as growth of talent either, but as getting more copies of existing machines. They would be adding to present capacity but not getting new talents that could open new markets. For me they are not growth engines but merely machine acquirers, which will not be valuable talents as the business changes. Investors can see which type of stock I would acquire, even at somewhat of a premium price.

 

Question: What do you think about my approach?  

                                        

 

 

Did you miss my blog last week? Click here to read.

Mike Lipper's Blog: Investors’ Interlude - Weekly Blog # 937

Mike Lipper's Blog: Not Yet Ready for a long-term Solution - Weekly Blog # 936

Mike Lipper's Blog: We Have a Management Problem - Weekly Blog # 935

 

 

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