Mike Lipper’s Monday Morning Musings
Rhymes + Future Opportunities
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Truths
From the beginning of human evolution, elders have instructed
the young with real and imagined tales of history. For the most part, the
speakers were survivors or were protected by survivors. The smarter of the
young learned two things, histories tend to repeat, but not exactly. This is
where the rhyming came in. Only the very smartest of the young learned that
there were tales by losers. To continue being a living survivor the truth in
many cases was disguised, as it was more threatening than going into combat. Many
passed on their knowledge of events through playwrights, actors, singers,
producers/directors and students of the past as made-up dramas.
It is too bad that most historical dramas are not taught
with a deep understanding of the politics and economics of the day. Matter of
fact, that is probably how a skilled professor should teach economics. There is
a risk in doing so, as we prefer tales of winning rather than why things
happen. Notice that today major TV programs and theatrical productions are
produced by organizations dependent on others for capital and licenses.
With that as perspective, please look at William
Shakespeare’s Merchant of Venice. By the time he produced the play he was a
favorite of the British Crown. From an economic point of view the play was opposed
to the creation of debt and the timing optionality of repaying debt in
unfortunate times. Now, substitute the crown for the debtor in borrowing large
sums of money for war making purposes.
Does that ring a bell with the current President, who is a
personal user of debt and urges businesses to delay recouping wrongly
structured tariffs? The bigger problem is that most nations are similarly
staying in power by doing somewhat similar things. They are behaving as other
members of society do, e.g. businesses, non-profits (particularly universities
and hospitals), and retail individuals. In business courses we should teach the
proper way to create, manage, and use debt. (I don’t think it is taught at
Wharton, where the President attended, or perhaps he didn’t take the class.)
The Growing Problem
The following are statements from others related to the
problem:
- Barron’s - “Higher bond yields provide competition for stocks.”
- The CBO predicts a federal budget deficit of 5.8% in 2026 and 6.1% for the entire next decade.
- “JP Morgan looks to reduce exposure to $4 Billion in private equity-linked loans.”
Longer-Term Opportunities
After the debt problem has been delt with, I look forward to
a favorable period for equity investing. The following are brief comments that
show some hope for gains.
Earlier this year the only mutual funds enjoying substantial
gains were precious metals funds and those invested in “AI”. Currently, performance
leadership has broadened out to industrials, some financials, and some
international stocks traded beyond our borders. Currently, the mutual fund
averages in twenty-five sectors out of one hundred and five are doing better
than the average S&P 500 index fund.
The Financial Times discussed the investment success of
Chris Hohn, a very successful British hedge fund manager. In many ways his
portfolio is like the portfolio Warren Buffett and Charlie Munger put together,
in terms of its concentrated positions. However, Chris Hohn excluded some
industries from his portfolio that Berkshire had used in the past, like banks,
utilities, media, and insurance. Both he and Berkshire Hathaway (*) like
monopolies and duopolies and spend a great deal of time studying the barriers
to entry for the companies.
* Stock owned by personal and investment accounts
One of the largest industries critical to the health of the
world is the healthcare industry, which is selling at its lowest price since
2000. This is a difficult industry for me to directly invest in. Picking the
winner requires a good understanding of what is being developed in their own
and competing laboratories as well as the rules likely to be issued by various
government agencies. The way we participate is by using mutual funds that have appropriately
qualified staff.
One stock we own for the next bull market is Korn Ferry (*),
a leader in employment management. We see it an “ultimate income” play for “AI”
layoffs. It has a medium yield.
* Stock owned by personal and investment accounts
We are looking for more stocks for the next “bull market”.
Did you miss my blog last week? Click here to read.
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A. Michael Lipper, CFA
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