Long-Term Money Via Telescope, Not Microscope - Weekly Blog # 951

 

 

 

Mike Lipper’s Monday Morning Musings

 

Long-Term Money Via Telescope,

Not Microscope

 

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

 

          

 

Historical Perspective

One lesson from studying history, including geology, is guessing the very next move in a series, which is more likely to be random than consecutive. The news business is an exception, selling a detailed description of what just happened. For example, the weekend chronicles might point out that more stock prices went down than up for the latest week and did so with higher volume. They’ll mention that only 58% of the NYSE stocks declined for the week, including 38% on Friday, compared to the NASDAQ where 64% fell for the week and 55% fell on Friday. Not one of these pundits mention that in the earlier part of this year and most of last year a greater portion of the stocks traded on the NASDAQ rose. More importantly, these stocks were bought much more recently than those on the NYSE. This suggests that both the purchase and sale of the NASDAQ stocks were speculative, not long-term oriented investments.

 

Switching to the telescope for longer time periods. Long-term investors should focus on the changing structure of the US population, where more than 1.8 million people left the workforce (169 million in June 2026 vs 171 million in September 2025). Some of these people trade stocks and participate in the weekly sample survey of the American Association of the Individual Investors (AAII). This week they turned bearish on their outlook for the next six months, with only 29.6% now being bullish, down from 44.9% the prior week. Bearish beliefs have risen to 42.3% from 32.9% the prior week.

 

Investors have generally missed gains in some global and international funds, as well as commodity and alternative funds. To understand the current performance of diversified funds you need to recognize the increased concentration in a limited number of sectors. The history of making money in the stock market often goes along with being lonely during changing long-term future trends.

 

One advantage of devoting time to investing is occasionally seeing some occurrences replay. On Thursday there was the rescheduled White House Correspondents Dinner with the President speaking, which reminded me of my time as chair of the program committee of the New York Society of Security Analysts. I suggested to the President of the Society that we invite President Gerald Ford, the only non-elected president of the US to speak to the analysts. I was given permission to invite him, with the deep belief that it wouldn’t happen. I called the White House and spoke to the lead speech writer who thought it was a great idea, agreeing to speak to the higher authorities. Surprisingly, they were looking at opportunities for the President to speak to the financial community about his “Whip Inflation Now” or “WIN”. I was invited to visit the White House to meet with the speech writer and go over the President’s thoughts on the subject. It became clear that they didn’t really care about my political views, but what jokes would be appropriate. I rejected most of the jokes. Shortly thereafter President Ford came to our meeting quarters on Williams Street. He came with Alan Greenspan and Frank Zarb, who had just joined the Cabinet after a career of turning around several brokerage firms. A topic I would have liked to hear more about. When the President came to the NYSSA, he was the first President since George Washington to speak on “Wall Street” while still in office. He included all the proposed bad jokes.

 

When President Trump spoke to the correspondents this week, he also told jokes that did not go over well. It seems as if Presidents speak about what they want and not about what their audiences want to hear. Like many investors, they don’t learn from history.

 

Those of us who pay attention to future liabilities for clients and ourselves should focus on the long term. What do you think?    

 

 

 

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Mike Lipper's Blog: Before Focusing on Shorter-Term Reactions - Weekly Blog # 950

Mike Lipper's Blog: Little Occurred During the Trading Week - Weekly Blog # 949

Mike Lipper's Blog: Searching for Future Long-Term Picks: Gathering Assets, Reasons to Search - Weekly Blog # 948

 

 

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Before Focusing on Shorter-Term Reactions - Weekly Blog # 950

 

 

 

Mike Lipper’s Monday Morning Musings

 

Before Focusing on Shorter-Term Reactions

 

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

 

          

 

 

We should recognize that several topics that arose this week will have longer-term implications and impact results for many years, if not future decades. None of these contributions to our thinking will influence things directly, but some or all may influence our future.

 

Smoke from the Canadian wildfires has blanketed much of the US. Sports activities were delayed in Philadelphia, and the World Cup game in Miami was also influenced. The important message is that the US is not an isolated country, activities in both Canada and Mexico have measurable impacts on us.

 

The World Cup competition introduced real America to many sports fans from all over the world. Prior to traveling to the games many people looked at the US as Manhattan below 60th street, a few government buildings in D.C., and some sound stages in California. Costco, Brooklyn, and our national parks have awakened them to the country’s beauty, its friendly people, and a large population of many talents. It also showed athletes playing their game better than those representing America. I suspect by the next World Cup we will produce better results too. The biggest change is likely to be in women’s soccer.

 

Our media and our President comment on “the stock market” as if it were singular. Furthermore, the direction of the market is aligned with the economy. Increasingly, “the market” is made up of several smaller markets moving differently from each other. For most of this year, important sections of the market have been pointing down compared to a limited number of tech companies going up. The stocks of some of the nation’s leading healthcare companies are selling at 1990 or 2000 prices. These companies are rarely mentioned by pundits or politicians. In future it would be wise for investors to participate in the growth of Asia, and later Africa and the Middle East.

 

The final US input may be a collection of groups in Congress having only titular relations with the two main parties. The main battle will be in the Senate, which takes 60 votes for most legislation to pass. However, neither party will be able to count on all its members due to some issue specific deserters. This could lead to the only functioning group being a conflicted White House ruling through executive orders in all agencies except the Fed.    

 

Clues To the Future

The Three Jobs

Security Analysts essentially have three jobs. The first job is to avoid being tagged with losing money, or worse, having a negative relationship with a paying client. The second, and most common function, is to be associated with winning positions or clusters of winners. The third job is to successfully support the sales effort of the organization.

 

What is our Role?

First and foremost, our first loyalty is to our investment management clients. If we are reasonably successful, we then earn the privilege of sharing our views with others through this blog.

 

We Use this Blog to Shape our Thinking

The price action of common stocks did not give us much help last week. In general, the daily moves were equally balanced between gains and losses. However, the latest sample survey of the American Association of Individual Investors (AAII) had their six-month expectations swinging a bit positive. (The AAII survey does not cover the end of the week, and many market analysts treat it as a contrary indicator at “turning points”.)

 

Our Biases

We think we do a good job over an extended period for long-term investors. In our longest multi-generational account of sixteen positions, five holdings represent over 50% of the gains. This demonstrates that most of the time we prefer both a small list of holdings and the ability to let winners exceed the SEC’s definition of diversified. Our accounts consist of both common stocks and mutual funds, or the manager’s portfolio. We also own securities that invest overseas, which are appropriate positions for this account, but may not be for others.

 

Some Hints for Long-Term Buyers

Two very popular stocks, IBM and Space X, which we do not own, declined this week. Both have lessons we believe are important for long-term investors. The fall in IBM was caused by the company’s disclosure that their software, consulting, infrastructure, and main frame computer customers are switching to buying “chips”. While pundits focused on what they were not buying from IBM, the item that struck me as even more important was the decline of items tied to main frame computers. IBM was responsible for selling some 60% or more of these expensive devices. In future there will be some consulting and infrastructure sales, plus an ever-decreasing number of mainframes. Furthermore, they no-longer have the advantage of being the first computer company with “sales engineers”. IBM is not the company that my grandfather loved. The lesson for all of us is that even one-time great companies can have economic difficulties. There is not a single company remaining from the original Dow Jones Industrial Average (DJIA), with the majority of them no longer in business.

 

At the other extreme, Space X is a business with exciting future products and services which also declined this week, selling below its original public issue price. In our role as portfolio manager we do not invest in highly sought after IPOs.

 

Despite the problems associated with these two leaders, the number of advancing prices on the NASDAQ exchange were higher than the number of decliners this week. However, on the older New York Stock Exchange (NYSE) the reverse was true 46% vs 59%.

 

Question: What if anything I have said do you agree with? 

 

 

 

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Mike Lipper's Blog: Little Occurred During the Trading Week - Weekly Blog # 949

Mike Lipper's Blog: Searching for Future Long-Term Picks: Gathering Assets, Reasons to Search - Weekly Blog # 948

Mike Lipper's Blog: What is Pending and When - Weekly Blog # 947

 

 

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Searching for Future Long-Term Picks: Gathering Assets, Reasons to Search - Weekly Blog # 948

 

 

 

Mike Lipper’s Monday Morning Musings

 

Searching for Future Long-Term Picks:

Gathering Assets, Reasons to Search

 

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

 

          

 

 

Inputs from This Week

1. The Consumer Confidence Index was 91.4 vs the 94.4 expected. The index was however up from last month’s 90.6.
2. The American Association of Individual Investors (AAII) sample survey projections for next six months are Bullish 31.4% vs the prior week’s 42.3%, Bearish 42.3% vs the prior week’s 36.3%.
3. Workforce participation of 61.4% is the lowest since the covid readings. (We have made working on payroll unattractive for some.)
4. In some European countries the number of air conditioners is small, and some are even being removed. (The founder of modern Singapore stated that the installation of “AC” led to the economic growth, enabling it to become the fifth richest economy in the world.)

 

Future Investment Problems

1. Americans misreading foreign data. The foreign performance of indices and positions is converted into US dollars from the local currency. As the US dollar is currently stronger than most other currencies, it makes foreign investments look more attractive. We tend to forget that most US investors temporarily rent foreign securities. When we sell in declining markets local buyers are often the only buyers and they are not generous.
2. When looking at the statics of a company, investors look at where the fiscal headquarters of the company is located, not where the product or service is sold. Consequently, many investors currently think they are investing in the UK, Taiwan, or South Korea. The Financial Times 100 largest companies, which dominate the local British stock market, makes almost none of its operating earnings are earned in the UK. It is my guess that a good many US investors think their rapidly expanding earnings are coming from South Korea and Taiwan, not by what is happening in the US.
3. Investors are often attracted to various securities indices due to a handful of the leading performing issues within the index. These companies, at least for a while, perform better than the indices. However, history tells us that it is only a matter of time before the leaders become laggards and detract from the performance of the index.
4. One recent concern of mine is that a senior American General in Europe is resigning. He is a four-star general with a very good battle record. I don’t believe it is an appropriate time to reduce our military leadership anywhere, particularly in Europe.
5. As a portfolio manager for long-term beneficiaries, I am very conscious of the variability of performance records. Looking at the recent five-year period, only six mutual fund sectors had average performance better than the S&P 500 Index Funds average. For the ten-year period, only Large-Cap Growth Funds and Domestic and Global Science and Technology Funds beat the S&P 500 Index Funds average. Considering the CEOs of many companies don’t last beyond five years, with even fewer lasting ten years, I am particularly nervous about those whose stock prices depend on “AI” products and services. (I wonder how many repeat orders there are for their present products and services.) Many of last year’s leaders are selling below last year’s performance ranks.

 

Possible Buys

The one major stock group selling below its 2000 price is Healthcare. I do not know these stocks well and tend to use specialty funds to invest in the sector. I will probably reach sell decisions without much help from the industry, but that may be a long time from now. Without a lot of knowledge, I am starting my learning efforts with Johnson & Johnson and CVS Health. I like their strategies but don’t know their tactics, managements, and their outlooks for their critical present and future drugs. Furthermore, I don’t know the outlook for government regulation. I need any help subscribers can provide.  

                                         

US Gifts to Others

Those in the US are incredibly lucky, or if you prefer God Given, considering the benefits/gifts we have received. However, it is wise to note that some of what we have given to the rest of the world is not always beneficial, as shown below:

1. A constitution that enshrines the rights of minorities.
2. An education process that attracts students from all over the world, who return to their homelands and contribute to them.
3. A military power that has critically helped defend other countries.
4. Innovation, which has produced great things for the world. 

 

Hope you had a good July 4th and life gets better.

 

 

 

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Mike Lipper's Blog: What is Pending and When - Weekly Blog # 947

Mike Lipper's Blog: Too Many Short-Term Worries To Pick Long-Term Winners - Weekly Blog # 946

Mike Lipper's Blog: Is This the Last Hurrah? - Weekly Blog # 945

 

 

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New Era? - Weekly Blog # 944

 

Mike Lipper’s Monday Morning Musings

 

New Era?

 

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

 

          

Evidence

After an extended period of daily market movements below 1% per day, the most meaningful stock market index fell -2.64%, with the technology sector falling much more. The 30-company Philadelphia Semiconductor Index which produces the critical needs for “AIs” explosive growth fell -10.3%, while the NASDAQ Composite fell -4.18%. (This is not the first decline for a new technology driven bull market, which was led by railroads, canals, and undersea cables in 1873. These stocks traded on exchanges in America, London, and Vienna. In Vienna the market dropped 45% in one day.) Despite the happy talk from Washington and various pundits, we have seen continued notices of layoffs from large, seasoned companies, including by Macy and Saks. In New Jersey, April unemployment was 4.8% vs 4.3% nationally. (It was just announced that Exxon and Chevron have changed their state of incorporation from New Jersey to Texas.) What is more significant to me is the number of bank branches that are closing. Perhaps more significant is the observable factor that attractive, wealthy women, are not wearing expensive jewelry while shopping or at performances.

 

Midweek, the AAII sample survey showed the market outlook for the next six months being 36% bullish and 37% bearish. (I suspect that if the survey was done after Friday’s market, we would have seen a bigger total for the bears). Interestingly, some stocks that typically don’t attract tech buyers, like Coca Cola* (+3.46%), Moody’s* (0.49%), and even Apple*, fell less than the market (-1.25%).

*Owned in managed or personal accounts.

 

My View 

Most analysts and pundits compare stock price performance to past cycles to determine investment policies, much like telling time with a stopped clock. Seldom in an investment career does it pay to look for meaningful structural change. One way to do this is to recognize that old firmly held beliefs, like a flat earth, keep us from falling into the abyss. Like Columbus, we should seek to find new riches by going against the popular view, putting faith in a compass over an orderly world view. Similar to Columbus I may be wrong, but I will hopefully reward my backers with fabulous wealth by addressing society’s real problem, far too many unproductive people. Not only are the young unproductive, but there are also healthy seniors not working for money or the good of society.

 

Today’s government employment data shows that there are sufficient job openings for all the unemployed, although the hirers say they can’t find enough people to meet their needs. Only 61% of our population are employed. I translate that to mean they can’t find people with the correct attitudes and education to meet their needs. This is an indictment of both our schools and homelife. To solve this problem, they should automate wherever possible, which can mean using “AI”. 

 

 For many years I boarded a 6 AM train with papers to read, reaching the office at about 7 AM prepared for my first meeting with colleagues or committee members of the New York Society of Securities Analysts, the trade association of my profession. I was not alone, I would meet other analysts outside their offices for a bite of breakfast, where executive committee members were also having breakfast with their direct reports or others that were on the way up. (This was not the normal day that the executive committee officially met, but they were still doing business.) After a full day working numbers and writing reports, I caught the 6 PM train home. I arrived at close to 7 PM and then spent time with my children going over how they spent their day. Thus, my workday was 12 hours, with some additional time spent on the weekend. I probably spent some 70 hours a week fighting my way up the ladder.

 

The law calls for a 40-hour week, which does not include lunch. Today, according to the Department of Labor, the average American works a little more than 34 hours a week and that time probably includes lunch. If you listen to the young people of today, they believe in a work/life balance of at least 50/50. No wonder our productivity grows at around 3%, which appears to be higher than in China.

 

“Evidently, when Trump visited Xi Jinping last month, the Chinese president made a pointed reference to the concept of overstretch. A concept that was put forward over two millennia ago by the ancient historian and general, Thucydides. Can China and the US overcome this trap? There is also the risk of war expenditures becoming greater than the rest of the economy. The current administration, unlike China, is extremely focused on short-term-announcements impacting the mid-terms. Strategically however, both the President and Xi Jinping are aware of the seminal work by Rear Admiral Alfred Thayer Mahon, titled The Influence of Sea Power Upon History.

 

See what you can do to increase productivity and put more of us to work for society. Your help is needed.

                                         

 

 

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Mike Lipper's Blog: Warnings Increasing - Weekly Blog # 943

Mike Lipper's Blog: Rhymes + Future Opportunities - Weekly Blog # 942

Mike Lipper's Blog: Many Trends Within the Same Market - Weekly Blog # 941

 

 

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Not Yet Ready for a long-term Solution - Weekly Blog # 936

 

 

 

Mike Lipper’s Monday Morning Musings

 

Not Yet Ready for a long-term Solution

  

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

 

 

 

Preface

I was hoping to start a series of blogs on the selection of smart securities investment strategies for multi-generational ownership. Unfortunately, the current data does not lead to a positive view. The breakdown of the twenty-hour cease fire negotiation with the Iranians confirms that this was a week of data confusion. The historical odds were against progress in the search for political and economic solutions.

 

Our Side

The investment mode for the week is captured by the changes in the American Association of Individual Investors (AAII) sample survey of the next six month’s market outlook. The bullish outlook improved slightly to 35.7% from 33.6% the prior week, a gain of 2.1% in a not highly disciplined survey. What is perhaps a little more insightful is a drop in the bearish measure to 43.0% from 51.4%, a decline of 8.4 %. During the survey week, many pundits were enthused about the forthcoming ceasefire meeting. (I expect Sunday morning’s announcement of a failure to get an agreement will materially impact this coming week’s results.)

 

The two largest stock market exchanges reflected different views, with only 31% of NYSE stocks falling vs 53% of NASDAQ stocks declining. (The NASDAQ market has younger, more speculative companies, with a larger number of companies reporting losses, including some private debt funds.)

 

Consumer sentiment was reported to be lowest in 70 years. Moody’s (*) raised the chance of a recession in the next 12 months to 48.6%. One of their executives is quoted as saying “we could already be in a recession”. 

(*) Owned in managed accounts.

 

Iranians’ View

The first thing to remember is that Iran is the modern name for Persia, which was the dominant political/military power in the Middle East for hundreds of years. Persia was briefly lost to Alexander the Great and later to the Ottomans but was never effectively occupied by foreign forces.

 

The current view of the Iranians is that Trump is losing this war. He is driven to achieve a quick victory to guarantee a positive mid-term election this year, at least in the House. The Iranians are believers in the German strategist Carl von Clausewitz’s statement that “war is an instrument of policy by other means”. Our President went to a military high school, but I believe he at best learned infantry tactics, not strategy. He did not participate in the ROTC at University of Pennsylvania. The current Secretary of War did not have any professional exposure at West Point or VMI and thus was not schooled in strategy. One of Clausewitz’s beliefs was getting the other side to give up the will to fight. Unfortunately, since WWII the US has won wars but lost the peace in getting their opponent to give up the willingness to fight. The last time we achieved it was through the Marshal Plan, named after General George Marshal a graduate of VMI who rebuilt the industrial strength of Germany.

 

While the potential for nuclear warfare was a concern, the far greater risk to the US, Britain, Europe, Mid East, Africa, Latin America, and Asia were already active sleeper cells. At this point we have not yet organized an effective counterforce.

 

It is no wonder the weekend discussions did not produce positive results. Consequently, it may be too early to invest new long-term money.

 

These are controversial views. Please exchange your thoughts. I am always a student and need to learn.

                                        

 

 

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

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This week’s Dichotomy/Bifocals Needed - Weekly Blog # 932

 

 

 

Mike Lipper’s Monday Morning Musings

 

This week’s Dichotomy/Bifocals Needed

 

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

 

 

 

1 week = 1 month, or 1 or more years

From this investor’s viewpoint, the previous five trading days could be seen as a great dichotomy. Seventy seven percent of NYSE stock prices declined and 66% of NASDAQ stocks. Additionally, the US dollar rose in price to 100.362 on Friday from 97.70 on Thursday!!

 

The stock price decline was supported by a sharply increased bearish reading in the American Association of Individual Investors (AAII) sample survey looking 6-months ahead, which rose to 46.4% from 35.5% the prior week. There was only a slight fall in the bullish six-month prediction which fell to 31.9% from 33.1% the prior week. Large publicly traded companies continued to report little to no hiring to offset those retiring.

 

One might have thought that worries about inflation would have had more impact, with the ECRI industrial price indicator rising to 130.99% from 126% the prior week. The index was up 9.59% for the last 12 months, but that didn’t seem to retard the jump in the dollar on Friday.

 

If one listened to the advocates of The President, the move in Friday’s dollar pointed to good times ahead. Other factors they mentioned were part of the reason the majority sold stocks this week, including on the last day of the week. We therefore have a dichotomy, which is a condition that can’t last or perhaps requires a different analysis?

 

The correct analysis is a condition that possibly occurs to seniors. That is the need to get corrective eyewear (glasses or implants). Perhaps we need to use one set of lenses for short distances and one for long or perhaps use bifocals.

 

We could be drawing close to the time when we will know whether the short-term optimistic view or the longer-term more pessimistic view followed by optimism is correct.

 

Watch the S&P 500

There are four major US stock market indices quoted in the press. The Dow Jones Industrial Average (DJIA) consists of just 30 stocks weighted by their stock prices, whereast he Standard & Poor’s 500 is weighted by market capitalization. The NASDAQ Composite is also capitalization weighted of about 500 stocks, although some stocks don’t have public records for five and ten years. The Russell 2000 Index is small-cap focused and suffers from a significant number of companies reporting losses. For analytical and investment purposes, most large financial institutions use the S&P 500 Index.

 

The S&P 500 Index closed at 6,632 on Friday, the lowest price in over four months. Market analysts believe a further decline of more than 3% will make a near-term market rise above its former high of 7,002 difficult for an extended period. The reason for this is, many of the investors who bought stocks before the decline will try to breakeven on the way up, making progress slow. 

 

Question: What do you think?

 

 

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Mike Lipper's Blog: Premature: Buying Program to Begin Soon? - Weekly Blog # 931

Mike Lipper's Blog: Expectations Changing? - Weekly Blog # 930

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Expectations Changing? - Weekly Blog # 930

 

 

 

Mike Lipper’s Monday Morning Musings

 

Expectations Changing?

  

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

 

 

 

The Main Motivator They Don’t Teach

Fear is the main motivator they don’t teach you about in pre-kindergarten through Ph. D studies. Primarily, this list is comprised of what can go wrong and what will hurt you, such as going broke, losing a job, or being defrauded. Discussions are informative but not particularly action oriented. What would be useful is a list of expectations, and of prime importance how to recognize them and what to do. These are life lessons which we all need but are not taught.

 

Each of us has our own level of awareness of critical expectations and we are aware of the changes in them. While all aspects of human life are open to change, I am going to focus on the expectations which impact our investment realities. These expectations are easier because they deal in large part with numbers. Numbers, like prices or earnings per share, are precise but mean different things to different people at different times.

 

The difficult part of dealing with expectations is identifying when they change and by how much. For example, a stock price expectation between $103 and $98, or an earnings per share expectation between $0.67 and $0.70. The critical issue is how early, or late investor expectations begin to evolve compared to others. Being early or late is often more impactful than being right or wrong?

 

Are We Changing Expectations?

A recent January survey of institutional investors had 50% expecting stock prices to rise, 39% expecting prices to be stable and 10% expecting prices to fall. An American Association of Individual Investors (AAII) six-month sample survey of investor expectations found 33.2% bullish and 32.9% bearish. Three weeks ago, both groups were about equally sure at 38%.

 

For the week ended Friday, more stocks fell on the NYSE and NASDAQ than rose (NYSE 56% and NASDAQ 53%, respectively). Normally slow-moving industrial commodity prices rose to123.06% from 121.92% the week before.

 

Most important of all, the US and Israel bombed Iran on Friday night. (The timing of the attack was a surprise to most, although the US has been building up its military and Naval forces in the Middle East recently.)

 

For some time, large companies in the US have not replaced retiring workers with new hires. We will see in the coming week if there is a large change in market expectations and whether that change in expectations is long-lasting.

 

 

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Mike Lipper's Blog: Diversification - Weekly Blog # 929

Mike Lipper's Blog: To Win Long-Term, Learn From Great Presidents - Weekly Blog # 928

Mike Lipper's Blog: Strategically, Time to Think Differently - Weekly Blog # 927

 

 

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Diversification - Weekly Blog # 929

 

         

 

Mike Lipper’s Monday Morning Musings

 

Diversification

 

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

 

                                                                        

 

Preface

On a recent trip to London, Ruth and I attended a private fund and friend raising concert for the Academy of St. Martin’s in the Fields (ASMF), where Ruth is the first American trustee. The wonderful music was performed by Joshua Bell, the artistic director, and five other top-notch string musicians from the ASMF. Between the six talented musicians they played three different types of string instruments, alternating between lead and ensemble roles. The result was a successful combination of each of their talents.

 

Even when listening to a magnificent concert performance, I cannot forget my investment responsibilities. As individual musicians alternated from leading to supporting roles, it reminded me of what individual securities should do in a diversified long-term investment portfolio.

 

Application to Portfolio Management

In 1940 the SEC completed their depression-oriented reform rules. Among the last of these was the Investment Company Act of 1940, which unlike the other six regulations was not formed at their SEC headquarters. It was produced at the Mayflower Hotel in Washington by lawyers for the fund industry from Boston, New York (where the industry’s trade association was headquartered), Philadelphia, and Washington. Considering their recent experience of the market falling during the Depression, the mood of the meeting was to try reduce the chance of big future declines. The best model for that were state laws governing trust accounts, using generations of work by Boston and Philadelphia lawyers. (Even as late as the early 1960s a few Boston law firms had professional securities analysts on staff to assist in managing trust accounts.) Note, the main concern of the creators of fund regulation was the avoidance of losses. No word was spoken of making money on investments.

 

They thought the best way to reduce the chance of major losses was to limit an account’s exposure to any single investment. This led to limiting the percentage amount that funds could invest in any one stock, which usually meant no more than 5% of the voting stock at cost (not market). To this very day, most equity funds are labeled as diversified if they adhere to this principal.

 

The Problem with Voting Stock Limits

The biggest penalty paid by investors is not losses, but the absence of profits. Mutual Funds with long histories often make ten, twenty, or even more times as much on some of their holdings, which more than covers a small number of losses. Furthermore, great fortunes have been made, particularly over successive generations, in single stock portfolios or portfolios having a small number of investments.

 

For Professional Investors

The concept of risk management is critical but doing it by name or percentage of voting shares does not reduce risk, it may increase if all investments are exposed to a single concept. In the late nineteenth century professional investors considered concentration to be the best and safest way to invest. My college degree is from Columbia University, which had an endowment fully invested in railroad bonds and stocks, every single one file for bankruptcy. Today there is a risk that some participants in the “AI” surge could produce similar results by investing in too much in a good thing.

 

For publicly traded securities I suggest the biggest risks is with the stock owner and not the issuer, as they will be sellers of the stock before you do. Other risks include countries, technology, politics, and management. These can be identified as short-term and long-term factors. A possible short-term indicator is slightly more participants being bearish than bullish in the latest American Association of Individual Investors (AAII) survey of expectations for the next six months. Interestingly, the long-term indicator was Friday’s announcement by the Supreme Court, which ruled against the President’s authority to set tariffs using the International Emergency Economic Powers Act (IEEPA), which had very little to any impact on the market.

 

Bottom line, watch the musicians play and how well they work together, both with other musicians and staff, but also watch the reaction of the audience.

 

Understanding Going Global

In a recent conversation with a London-based fund manager, who in the past was almost completely invested in the US but now has a growing position in European stocks. While he has the biggest portion of his portfolio in US securities, he is very risk aware and expresses this by augmenting his portfolio with European stocks. Normally, he expects his US positions to outperform his European positions, but not in a declining market. In terms of P/E, Free Cash Flow, Dividend Yield, and other value measures, European stocks are less risky than US holdings.

 

 Another careful investor was Charlie Munger, who listed six principles to be avoided: High Financial Leverage, High Operating Leverage, Negative Cashflow, Poor Governance, High Risk of Obsolescence, No Competitive Advantage vs. a Strong Competitor.

 

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Strategically, Time to Think Differently - Weekly Blog # 927

 

 

 

Mike Lipper’s Monday Morning Musings

 

Strategically, Time to Think Differently

 

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

  

 

Warning: Almost No One Will Agree, Nevertheless Consider

My Burden: Hedging

 

After a market week of lots of good earnings and media pundit optimism, it’s time to worry. Individually, before we consider securities investments, we should consider our personal long-term investments. For most of our adult lives our two biggest investments are our homes and jobs. While we believe we know the numbers, we are wrong!

 

We fail to include in the analysis of our residence the true costs that come with the property over time. For instance, we do not include real estate taxes, either paid directly or included in rent payments. If we stay in our homes for ten years, in one place or more, the aggregate cost will probably equal the cost of buying initially. But that is not the actual cost of living in a home. That amount should also include the cost of local organizations we join, as well as the cost of any repairs and maintenance. Thus, the combined cost should be considered, as well as the planned next location, which likely represents a potentially large unhedged risk.

 

As large as the cost of home ownership is, it is hopefully smaller than the next risk. For most of us, our biggest risk throughout perhaps the first twenty years of our adult lives, is employment risk. If we work for one or multiple employers and we are not self-employed during most of our working years, our biggest risk is employment risk. We are living in a fast-changing economic world, where employers disappear as a result of business mistakes, technological change, badly executed mergers, and younger, smarter, better educated, and cheaper competitors.

 

We are Not Helpless

Over time, we can not only help ourselves but also accumulate sufficient capital to provide long-lasting wealth to cover our own lives and hopefully those of our loved ones too. This can be accomplished by regularly spending less than we make through our jobs and investments. Cyclicality is our enemy. As we move up in the commercial world an increasing portion of our wealth comes from accepting portions of compensation that have equity-like rewards and risks. The further you move up the economic ladder, the greater the rewards and risks. Additionally, the higher you go up the ladder, the more cyclical it becomes. Income fluctuates with sales and profits, but also due to changes in politics within the organization. This cyclicality should be hedged to the degree possible.

 

Selection of Investments is Critical

Picking good investments is always difficult. For the most protection, the primary goal should be seeking assets that hedge those investments generating the highest gain. I believe we are on the cusp of a period of major change, not the continuation of “happy talk” optimism. This past week there were dramatic headline changes of direction, but the market as measured by the S&P 500 barely returned to its prior high. Concurrently, the Economic Cyclical Research Institute (ECRI) industrial price indicator dropped to 122.27% from the prior week’s 131.20%. While this was an extremely happy reading of growing inflation, I suspect it was driven by natural gas prices plummeting -21.41% and diesel falling -4.79%. Far too many retail investors follow prices on the NYSE, where 39% of the stocks declined for the week. However, the better performing NASDAQ Composite saw 56% of its prices fall. Also, the American Association of Individual Investors (AAII) weekly sample survey showed the bullish outlook falling to +39.7% from +44.4% the prior week. In the real-world January produced the largest cut in jobs, which have been falling for 8 months.  

 

Conclusion: One Should Hedge

 

 

 

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Is This The Week That Ends Instability? - Weekly Blog # 924

 

 

 

Mike Lipper’s Monday Morning Musings

 

Is This The Week That Ends Instability?

 

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

 Preface

I believe it was Lenin who said there are decades when nothing happens; and there are weeks when decades happen. Possibly, the four-day trading week beginning this coming Tuesday is such a period. In both the Financial Times and her podcast, Liz Ann Sonders of Charles Schwab* introduced the concept of the period we are going through as an extended period of instability. I am suggesting it is possible the beginning of the end of this period may have begun.

*Shares held in in managed and personal accounts.

 

Fund Data Sets the Table

Whether one invests in mutual funds or not, one should recognize that not only do many people invest in them, but more importantly, many fund managers get their training at fund shops. Thus, one can get an understanding of the institutional mind set by looking at fund data. In the five years ended last Thursday, the London Stock Exchange Group published my old firm’s weekly study of 105 equity related mutual fund peer-groups average performances.

 

The average performance of S&P 500 Index funds was 14.05% compounded for the past five years.  There were only five peer group averages that were better: Precious Metals Equity Funds +21.50%, Energy MLP Funds +20.79%, Commodities Precious Metals Funds +18.75%, Natural Resources Funds +17.30%, and Global Natural Resources Funds +16.05%.  There were just two better performing thematic categories, precious metals and energy. The narrowness of performance leadership proves how difficult it was to pick winners for the past five years. The leadership crown was indeed unstable.

 

Another way to identify the instability in economic data is to examine the tails of the best and worst 2 items shown in Saturday’s WSJ weekly price chart. The best was Silver +11.67% and the second best was the KOPSI +5.55%. The second worst price performance was Financials -2.33%, which was half as bad as Corn -4.71%, the worst performer. The gaps between the top two leaders and laggards suggest concentration is at play.

 

Turning Points Possible Next Week

On Tuesday, probably in the late afternoon, SCOTUS (Supreme Court of the US) is expected to announce its decision on the IEEPA tariff. The President has said he is prepared for an unfavorable ruling and has substitute measures in mind. At best this will be disruptive, and possibly inflationary. The ECRI industrial price index, which is normally slow moving, rose to 120.49% from the prior week’s level of 117.42%.

 

Markets are anticipating problems, either from Tariffs or possibly Iran. Sixty-two percent of the stocks traded on the New York Stock Exchange (NYSE) rose last week, while only fifty-three percent rose on the NASDAQ. The NASDAQ trades more tech stocks and the shares of younger companies. Thus, the junior exchange is likely to react more than the “Big Board” to news events. Retail investors, when not gambling, are more active on the junior market. One possible measure of this is the American Association of Individual Investors (AAII) sample survey, which reported 49.5% bullish for the next six months, up from 42.5% the prior week. What may be more significant is the 28.2% that were bearish. Many professional traders believe “the public” is wrong at turning points.

 

The Davos meeting begins Tuesday, with many political and economic leaders present and chatting. One doesn’t know what will be discussed and how meaningful the meetings will be.

 

Keep us Informed as to any Changes in Your Views.   

 

 

 

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Mike Lipper's Blog: Data May Be Signaling Change - Weekly Blog # 922

Mike Lipper's Blog: Investment Time Horizon Should Pick How You Measure the Results - Weekly Blog # 921

 

 

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Investment Time Horizon Should Pick How You Measure the Results - Weekly Blog # 921

 

 

 

Mike Lipper’s Monday Morning Musings

 

Investment Time Horizon Should Pick

How You Measure the Results

 

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

  

 

 

Current Situation

Billions of people invest directly or indirectly in US securities markets, with each having somewhat different motivations and thoughts about what they are doing. Since we don’t know these people and the way they think, we simply group them into buckets. I have found the intended investment period often defines how they invest and for what period.

 

My outlook is of someone who has served families and institutions, and I tend to think long-term for them. As most money invested in mutual funds is largely for retirement and most institutions are designed to pay out their assets over an extended period of many years, they too have a long-term time horizon. (Unfortunately, this focus on the long term does not come with a knowledge of what the future will bring in terms of risks and rewards.)

 

The media concentrates on “news” and fills space with the current chatter about the present and the next expected announcement of note. Most security salespeople and money managers believe potential investors are primarily interested in the present and that is the focus of their sales pitches.

 

These two different focuses have led to two very different market structures. The hyper action-oriented players dwell on any market development that leads to a move in stock prices. They celebrate the percentage gains of interim results and prognostications. Those who use securities to meet future payments are concerned about anything that might reduce these payments in terms of future purchasing power. A possible tell-tale signal of a threat is the sale of securities by supposedly knowledgeable investors.

 

This is the tug of war between those seeking near-terms rewards and those worrying about the loss of worth of some future payment. To satisfy both camps the stock exchanges publish the volume of shares sold at higher and lower prices and the number of issues which rose and fell each trading day.

 

In the latest week there were only four trading days and one of those was half a day. On the last day the volume of shares traded on the NYSE was down by approximately 2/3rds and by approximately one half on the NASDAQ*. (In the current market environment, I pay more attention to the NASDAQ, as it has risen the most this year due to having more “Tech” companies, whose stock prices are more volatile than those on “The Big Board”. On Monday the 4 indicators were larger for the NASDAQ and on Tuesday the NYSE saw better results. This see-saw pattern has occurred frequently throughout the year.) For the week, 65 % of NASDAQ stocks rose in price vs 61% for the NYSE.

*Client and personal accounts own shares in NASDAQ.

 

In terms of looking at the future there were two interesting notices. The Conference Board Consumer Sentiment Survey was 89.1% vs 92.9% the prior month. The American Association of Individual Investors (AAII) saw a drop in bullish sentiment for the next six months in their sample survey, dropping to 37.4% from 44.1% the prior week.

 

Understanding the Measure

Most of the chatter about this change focused on the percentage change from the period immediately prior. However, there is another way to look at the results, the way an actuary would in determining the chance of a certain event happening. This is done by reviewing the entire history of the statistical sample, including any possible period where that event could reappear and at what frequency. For example, one chance out of fifty years, or every 84 months, or something similar. History traced through geological discoveries has recorded cycles of expansions and contractions with some regularity. It is much easier with regular barter or the development of money.

 

Said simply, when there is a shortage of supply over the level of demand, prices go up. When there is more supply than demand, prices drop. Climate also impacts agriculture, as does the effort of humans. The supply of money was a recent concern, which has more recently shifted to concerns about the supply of credit and certain natural resources. In all cases, it is the imbalance of critical items which moves prices to a point of excess, which causes a reversal.

 

Small reversals happen more frequently than large ones, often occurring within a single presidential term. However, small reversals periodically stretch over two or conceivably three terms. In trying to avoid or stop small declines, the application of well-meaning changes can trigger bigger declines, which we label depressions.

 

Addressing the economic hardships caused by the cost of fighting WWI led to an extended period of debt expansion, which initially hurt the farming communities. This led to the application of tariffs to protect small banks which extended loans to over expanded farmers and farm equipment dealers in critically important mid-western senate seats. Simultaneously, the public became enamored with the use of credit in an already highly priced stock market.

 

The market crash of 1929 caused many people to lose money in margin accounts, along with many of their brokers. The market reached a bottom in 1931, but people were scared by what had happened. In 1932 they elected FDR as President as a protector of the banks, and he closed all the banks in 1933 in an attempt to restructure society. Even though FDR lost most of his battles with the Constitution and the Courts, he initiated various government agencies that mismanaged the economy until we entered WWII, which he helped start in both the Pacific and Atlantic. The US recovered slowly after the war and subsequent Korean Conflict, although some stocks listed on the NYSE did not reach their 1929 highs until the mid-1960s with the discounted dollar.

 

Semi Parallels Today

There has been an expansion of debt both at the federal and individual level, with bankruptcies currently rising. At the same time, prudent constraints on the financial community have been reduced or eliminated. Additionally, we have an underequipped military, including Navy, Air, Space, and Coast Guard not ready for a multi-front war.

 

Conclusion:

We don’t know when the next decline will happen, or if the depth of the decline will morph into a depression. However, we should resist being fully exposed to rising gains in the non-public market while we experience a stagnant private economy. It is possible gains achieved in 2026 may be expensive in the long run, so be careful.   

 

 

 

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Mike Lipper's Blog: Tis the Season of Joy & Reflection - Weekly Blog # 920

Mike Lipper's Blog: Are Investors Seeing a Change? Politicos Are Not - Weekly Blog # 919

Mike Lipper's Blog: On The Way To Casualties & Eventually Riches - Weekly Blog # 918

 

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