Mike Lipper’s Monday Morning Musings
Many Trends Within the Same Market
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Preface
The purpose of this preface is to share my long-term
thinking, which in part drives my current investment thinking. There is no
better portfolio manager thinker I have known than Peter Lynch, who produced a
stellar performance record with a large equity mutual fund over the 1977-1990
period. One of his beliefs was “Know what you own, and why you own it.”
One approach to investing is to be index aware or agnostic. My
approach is different in that it recognizes that all security prices are
cyclically dependent due to both the expressed attitude of the individual stocks
for security and to the market in general. My focus is on the client,
recognizing that they often have several perceived competing needs.
For multi-generational accounts, long-term performance volatility
is as important, if not more so, than simple performance, because it can shake people’s
confidence. Volatility multiples focused on by pundits in the press can scare
investors into dumping well thought out positions.
In many cases, accounts that are managed serially by members
of the family have good results, often due to patience and having seen
volatility in the past. There are a handful of globally managed accounts that have
worked reasonably well, which have both low volatility and good long-term
performance.
For future oriented accounts the selection process does not
depend on the present roster of products. New products, or more germane new ways
of filling critical needs can help companies become leaders in their fields.
Apple (*) is one such company, although you should be aware that this approach can
lead to failed products or approaches at times.
* Owned in client and personal accounts.
In today’s markets the primary way to avoid equity losses is
to invest in fixed income securities, which often have higher yields than
current short-term rates due to investing in lower quality or longer maturity bonds.
This approach may lead to unexpected losses from higher interest rates, which might
be discouraging and defeat the very purpose of temporarily getting out of the
stock market, which is to have a buying reserve. I prefer short-term, under
two-year maturities, or in a few cases middle yielding bonds with low
price/earnings ratios. In the latter case, you should be willing to sell these bonds
after a major market decline, even at a loss, to get cash to invest in stocks that
are more growth oriented.
There is risk in the growing amount of debt being undertaken
by governments, companies, and families, because of depleted accident/emergency
reserves. This could lead to a situation we have not seen in 95 years. A
significant change in the structure of the global economy that could take an
extended period to recover from. Moving further in this direction should cause us
to enter a period of reflection, recovery, and renewal. We need to be aware of
the possibility that this structural change might happen.
Now a View of the Current Situation
If you look at what is being reported in the current media,
you might think “the market” has a bullish future. The truth is, during the
latest week on the “Big Board” only 745 stocks, or 26% rose. Even on the on the
more speculative and shorter-lived NASDAQ Composite, just 31% of the stocks
were sold at higher prices.
For those who have been trained to look at bond yields as a predictor
of future stock prices, the average yield of ten high quality bonds picked by
Barron’s rose 15 basis points for the week, while a group of medium quality bonds
only rose 5 basis points. Rising bond yields mean lower bond prices, which is
negative for stock prices.
Two companies I follow are Berkshire Hathaway (*) and
McKinsey. Berkshire reduced the number of stocks in its portfolio while simultaneously
buying its shares at 144% of book value. McKinsey, a privately owned company, preserved
cash by cutting cash dividends and increasing equity distributions to its
partners.
* Owned by managed accounts and personal accounts.
I pay particular attention to the performance of mutual
funds. On a year-to-date basis through Thursday, 38 of 103 fund sector averages
beat the S&P 500 Index Fund average. It has been very difficult to beat the
performance of the S&P 500 Index for the past 10 years. Only 3 sector
averages have accomplished that, and they were all driven by investor
enthusiasm for “AI”.
The same thing happened among the leaders overseas, where a
1/3 of the emerging securities had some activity in “AI”. This was particularly true in Taiwan and South
Korea. AI labels, where the company is headquartered, should be viewed with caution,
as we don’t know what percent of the chips and computers eventually land in the
US.
One final statistic that I follow is the index of industrial
prices put out by ECRI. For the week the index finished at 145.33, up from 142.00
the prior week and 32.58 12 months earlier. Obviously, problems in the Strait of
Hormuz and other supply chain issues played a role in the increase.
Final impression
All investments
appear to have increased risks. So please be careful.
Did you miss my blog last week? Click here to read.
Mike
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A. Michael Lipper, CFA
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