Mike Lipper’s Monday Morning Musings
Next Election vs. Future Generations
Editors: Frank Harrison
1997-2018, Hylton Phillips-Page 2018
Time Horizons
Behavioral, political, and
investment strategies should be selected based on a measurement period,
acceptance of errors, and compound returns. While rarely identified, these
three factors often control the success of a chosen strategy.
Many people are currently very short
term oriented, distinct from the expressed time frame driving the Founding
Fathers of the US expressed in the Declaration of Independence and Constitution.
Four examples of this shortened time
focus are:
1. Selection
of Leaders in political, military, health, and corporate sectors. We unfortunately
pick leaders with political skills rather than courage to lead in a different
direction, with the focus is on the next election or selection. Both Henry
Kissinger and Jaime Dimon have written about the lack of foresight in the
world’s political and business leadership. (I would slightly disagree.
Autocratic leaders seem to be playing chess rather than checkers, which is what
our elected or selected leaders are doing.)
2. As
revealed in the recent “Varsity Blues” scandal, where some rich parents made
illegal payments to get their children into well-known Universities. Their apparent
motives were intended to ensure their young got admitted to these schools for bragging
rights, while others utilized “legacy rights” at their own alma mater to
achieve the same result. (That one’s children do not possess the appropriate
credentials to be accepted into these designated schools should have been
addressed years ago.)
3. Almost
all investment performance data in the press focuses on annual or shorter time
periods. This often mirrors the investment focus of many in selecting a fund or
manager. (While I can’t predict winners in future markets, I am aware that the
poorest performing advisors can occasionally produce the best results in future periods by recapturing some of the
prior lost performance.)
4. On
Friday the Dow Jones Industrial Average (DJIA) gained some 700 points. Supposedly
this was because of the questionable Department of Labor establishment survey
which showed a higher number of workers than expected. (There was almost no
coverage showing that only 6 out of 10 employable workers were on the job. For
many years, countries with 7 out of 10 workers employed were considered the better locations for
investing.)
Contrarian Views
The history of market prices around
the world suggests that the biggest gains come from a radical change of opinion
on the future performance of various securities.
After 15 years of the US stock
market being home to many of the big winners, there is some sentiment that more
global oriented companies will be winners.
Markets don’t have to follow nice,
neat calendar periods. In the US, stock prices generally rose in October and
November then declined a bit in December. It is quite possible that November
represented the end of the recovery period that started in June. Suggesting
Friday’s gain won’t be sustained for the month.
Only 10 out of 104 mutual fund equity-oriented
sector averages rose in December. Utilizing securities data on a national basis,
only China, Hong Kong, Japan, and Thailand gained over 1% (listed in
performance order).
Winning the Long Game
One of the long-term reasons mutual fund
investing performs better than many managed accounts with individual securities
is that the fund industry developed an easy process of reinvesting
distributions of income and capital gains. A number of large companies had
similar reinvestment procedures in the past, although they were dropped due to
lack of interest.
One of the lessons learned from the
thrift industry is that through the magic of compounding a series of small
contributions can produce meaningful returns over 12 to 30 years, particularly in
a market of generally rising prices where fund holders stay in the
product.
It is often the small and simple things
that lead to investment success: having patience, a long-term time horizon,
taking as much emotion as possible out of the investment process, not following
the herd and looking for opportunities elsewhere. While these items are simple
attitudes, they are often difficult to implement in practice. Investing is an artform;
therefore, one should allow for mistakes without deviating from good strategies.
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