What Could Go Wrong? - Weekly Blog # 954

 

 

 

Mike Lipper’s Monday Morning Musings

 

What Could Go Wrong?

 

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

 

          

 

To Predict is to Accept the Risk of Being Wrong

I read “The Psychology of Money” by Morgan House, which an investment friend suggested I read. The book suggests that the first task is to properly understand that most people view the future through the lens of their personal experiences in their early years. I try to broaden out my early experience of being born in the middle of the depression to a subsequently divorced working mother. Additionally, I’ve spent a great amount of time reading the history of many countries and cultures.

 

My view of the future is also influenced by my enjoyable time at New York racetracks, where I tried to end most days with more money than I started with. In essence, that meant comparing the posted odds versus the probabilities of winning, or at least coming in second, which has its own pool of bets that pay off separately. To accomplish that goal, I needed to guess what could go wrong for each of the horses in the race. I had to accept that the payoff was reduced by the track taking a portion of the winnings, along with various taxes and other expenses. The track-payoff was therefore less generous than the mathematical odds presented. Nevertheless, there was the occasional opportunity to leave the track with more money than when I arrived.

 

Using this approach, along with what I learned from both teachers and other students at Columbia University, I developed an understanding of the chance of specific future outcomes for various investments. The first thing I learned was to eliminate most securities, most of the time. (This was like Warren Buffett’s three sorting boxes of yes, no, and too difficult.) The formation of my investment philosophy evolved from these experiences, allowing me to earn more profits over time than losses taken.

 

Next Major Downslide

A study of financial history, and geology through the study of rocks, reminds me that we are always subject to up and down cycles, which come at irregular times. Since the earliest time humans have attempted to find a reason for the cycles, either through supernatural causes, the elements Gods, or men.

 

I begin with the view that the up and down slices of cycles are in part a reaction to past opposite extremes, as well as new elements. We are facing both today. The most frequent human reaction is the funding of expansions. Initially, expansions are paid for by the reinvestment of past profits, either by savers or revenue generators. Downslopes are often caused by the unexpected requirement to pay back loans, like the type described in William Shakespeare’s “Merchant of Venice”, which may have been a comment on Tudor spending.

 

My analysis suggests that the growth of debt is a general precursor to a depression. We may be in such a phase now, considering the combination of recognized and unrecognized government debt and the growth of private debt supplied by retail investors. This may be the reason the 30-year US Government Debt auction reached a level this week not seen since 2001. It may also suggest that foreign investors need higher rates to accept an increasingly unpopular government.

 

Typically, an event brings these types of worries forward. Perhaps something like this week’s announcement of the quick sale of the Los Angeles Lakers to cover other financial problems. Broader and more distressing to me is T. Rowe Price’s statement that it will take a couple of years to stem the net redemptions of their passive fixed income funds. The final sad note is an IBES projection that the net income of the S&P 500 will only rise by 0.3% a year from now at the end of the second quarter of 2027, before rising 17.3% the following quarter.

 

Since we are approaching 90 years since the last depression, the odds maker in me thinks the odds of another Depression is increasing.

 

What do you think?   

 

 

 

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

Mike Lipper's Blog: Are History & Economics Books Closed? - Weekly Blog # 953

Mike Lipper's Blog: Dead Cat Bounce > Last Chance - Weekly Blog # 952

Mike Lipper's Blog: Long-Term Money Via Telescope, Not Microscope - Weekly Blog # 951

 

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please

subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2026

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.