Premature: Buying Program to Begin Soon? - Weekly Blog # 931

  

 

Mike Lipper’s Monday Morning Musings

 

Premature: Buying Program to Begin Soon?

 

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

 

 

 

Basic Investment Principle

Investment opportunities are cyclical in both timing and magnitude. Larger gains are achieved after periods of extended declines. Since one does not know the extent of a decline or magnitude, it is wise to use a buying program. For instance, invest no more than 10% of buying reserves at any time. (This assumes you establish a buying reserve in rising markets. Charlie Munger has taught us to buy good companies at fair prices rather than always look for “cheap” prices.

 

Recently, my sister-in-law sent me a copy of a letter from my grandfather to my late brother sometime after he left the Marine Corps to begin his life in the investment business in the mid-1950s. My grandfather, who built his own brokerage firm for more than thirty years, cautioned my brother to always expect periodic recessions and less frequent depressions. He also advised him to not invest against the US, as the country was rich in natural resources. (This is still good advice, but there are times when our government makes our currency risky for a period.)

 

Where are We?

Most investors in defining where we are, do so by looking at where we have come from. The pundits wax poetic about recent data extrapolations, expecting the past to be repeated. My analytical training at the New York racetracks and as a US Marines Corp Officer was to always examine the current situation and expect some change.

 

Today, many pundits and politicians see an improving picture. As a student of financial history, I am conscious that it has been some time since the last recession. Furthermore, it has been 97 years since the Wall Street crash and the 12-year depression. Few people recognize any similarity between that time and our current condition.

 

Trading Alerts-Correction, Recession, or Depression?

The following are a number of alerts from last week suggesting we are entering a period of more declines than increases:

1. Morgan Stanley is planning to cut 3% of its customer-facing workers.
2. 73% of stocks traded down on the NYSE and 67% on the NASDAQ. A pattern which has been going on for several weeks.
3. The ECRI industrial price index rose to 126%, a 4.73% gain year over year. Clearly, the war in the mid-east is inflationary. 85% of prices tracked by the Wall Street Journal each weekend declined, echoing the ECRI results
4. Individual investors and those serving retail investors are not confident in their outlook for the next 6 months. 33.1% are bullish and 35.5% bearish.
5. The S&P 500 index is the best indicator of the market for both institutional investors and wealthy investors. Along with most other indices, the S&P 500 index fell on Friday. If this was the beginning of a recession and the index were to decline to where its rise began, it would drop 28%. If this was the beginning of a relatively mild depression, the drop could be 49%.

 

Advice to Buy Program Buyers

I have found it extremely difficult to buy at the exact bottom, as most declines don’t appear convincing enough. The advantage of using a buy program strategy instead of a one-shot purchase is that you will likely have a collection of winners and losers before the overall market has reached back to its original starting point, assuming you buy 10% each month or quarter. However, that is not the point of the exercise. You should want to hold your position until it has reached the condition of a great company at too high a price, where some trimming makes sense.

 

Please share your thoughts with us.   

 

 

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

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

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

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

 

 

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 – 2023

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission

Investment Markets are Fragmenting - Weekly Blog # 839

 

         

Mike Lipper’s Monday Morning Musings

 

Investment Markets are Fragmenting

Flows Going to Potentially Higher Risk

 

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

   

       

   

Why the Fragmentation?

The answer is simple, salespeople make money by getting investors to make investment choices. At the institutional level commissions have totally disappeared, and the same largely applies at the retail level too. However, “vigorish” is alive and well, just with different names for spreads, underwriting fees, and management fees. Passive clients may decide at some future point that management fees are not worth it.

 

A valuable client is one that is actively investing and directly or indirectly aiding in getting new active clients.  The value of a client occurs either through the flow of new money or the reallocation of the portfolio. The marketing agent is consequently a bit of a worrier when communicating with clients. Furthermore, there is a desire to introduce new investment ideas, particularly new types of securities or new investment markets. The marketer will often present him or herself, or their firm, as more knowledgeable than the client. Thus, the marketer can dominate the client more than they expect.

 

Performing Better with More Risk

What follows is a brief discussion of current possible ploys that might be suggested. In truth these ideas might be sound if executed when not so popular. If peers already hold positions in the new play, their length of time to the eventual peak and subsequent major decline is shorter.

 

There are a very limited number of investors who have trading skills, and that does not include me. Most successful investors hold a relatively small number of holdings for many years. These are the types of investors who own Berkshire Hathaway with the goal of transferring assets to heirs after they are gone. (I am one.)

 

Until perhaps this week, James Mackintosh a Wall Street Journal columnist, noted that “Four giant tech stocks added more market value than all other stocks in the S&P 500 for the last month.” I suspect many investors were enticed to buy those four stocks. Unfortunately for them, the only class of stocks to rise for the week ended Thursday were small caps. regardless of growth, core, or value orientation.

 

Many individual and institutional investors have portfolios consisting of stocks listed on the NYSE, usually with dividends. These investors might be enticed to invest in NASDAQ listed stocks due to the greater number of tech stocks. There is a belief that most short-term NASDAQ traders are better than those playing on the big board. In the latest week only 23% of NYSE volume fell, compared to 42% on NASDAQ.

 

The fastest growing asset class today is Private Investments, either individually or through funds. As is often the case, the biggest risk is not the issuer, but other holders. The sponsors of private debt and equity do not have an obligation to buy back securities, except at the terminal date. The secondary market is very limited, and prices favor professional dealers.

 

Jaime Dimon, CEO and Chair of JP Morgan Chase is worried about inevitable investment mistakes in the privates. Although he does not see a structural problem, I think there potentially is one for two reasons.

1. These securities are being sold to individual investors. When the public loses money, they often complain to the media and members of congress who are always pro regulation.
2. There are very few pension funds still operating. Many have promised fixed returns to government employees, which includes teachers. For years these plans have used interest rates much lower than current rates, many of which have been bought from insurance companies. I believe some insurance companies will go bankrupt if interest rates stay at current levels or go higher, with the retirement burden falling on taxpayers. Politicians are probably better at getting the feds to change regulations. A guaranteed payment funded by a variable (market) sensitive vehicle is dangerous.

 

What are Your Thoughts?

 

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

 

Mike Lipper's Blog: The Rhyme Curse -Weekly Blog # 838

Mike Lipper's Blog: The Most Dangerous Message - Weekly Blog # 837

Mike Lipper's Blog: Trade, Invest, and/or Sell - Weekly Blog # 836

 

 

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 – 2023

Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

Does the Decline Influence the Recovery? - Weekly Blog # 723

 Mike Lipper’s Monday Morning Musings

Does the Decline Influence the Recovery?

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

Positioning

As a contrarian I am comfortable sharing my view of the market with the majority. Sharing this view is not done to stand out among a crowd of students of the market, but to attempt to position myself and the accounts for which I hold myself accountable. Over time, the rate of return earned by the majority is less than some of the minority, who happened to be right for some reason. With that thought in mind, I will try to focus on the recovery from the predicted downslope we are in, looking across the unknown valley to the beginning of the recovery.

Where are We?

As is often the case, there are conflicting trends. In terms of stock prices, we are in a decline. Until it is finished, we won’t know if the decline is just a trading event, a correction, or a bear market. The media makes a distinction, defining a decline of 10% as a correction and a fall of more than 20% as a bear market. Using the most popular market indices the picture is muddled, with the NASDAQ Composite well into the correction phase, dropping -15.9% from its January high and even more from its all-time high in November 2021. The S&P 500 has flirted with the -10% level. (Based on the present length of the market expansion and the nature of changing stock leadership, I believe that we are heading for a bear market.)

The broader economy is also showing disturbing signs. The JOC-ECRI Industrial Price Index rose 2.8% last week and is up 31.3% for the year. January’s backlog data was up +19.6%, with the number of new orders up only +6.8% and non-durables up only +5.6%. In February, before the Ukrainian invasion, purchasing orders were down -3.8%.

“Buy the Dip” Advocates May Get a Bad Bounce 

This week in Seeking Alpha there were four different recommendations to buy shares of T. Rowe Price (a stock owned in both personal and managed accounts). I have had the pleasure and honor of meeting with all the firm’s Chairmen, going back to Mr. Price himself. I hope my heirs continue to hold these shares, although much like Berkshire Hathaway, I have concerns about a potential change in the shareholder base. The difference is price action may be signaling a long-term change in the valuation of the stock. The low price this week was $137.76, a long way from the 2021 high of $220. What is a bit more worrisome is the $137.76 low on Friday, on 2 million shares of volume. The high for the week on Monday was $145.11, on 1.6 million shares of volume.

I reviewed four recommendations of T. Rowe Price which touted the remarkable financial record of the firm and concluded the stock was a buy. I hope they are right; however, like most current recommendations to buy Berkshire, they dwell on history. When a stock drops by 1/3 and the “market” hasn’t fallen much, it raises questions as to the repeatability of the record. Clearly, if the record is repeated the stock is a great long-term buy, but if not repeated, it will disappoint shareholders staying on board. I have not read any reports questioning the long-term vitality of T. Rowe Price; however, I could dream up some worries that could cause disappointment if they turn out to be correct. 

The following is a brief list of issues that could go wrong in the future, which the firm has not dealt with in the past:

1. Private Equity and Private Debt have been important contributors to the gains in many of the firm’s funds and accounts. Almost every investment manager is fielding similar products. With so many firms raising money in the markets for “privates”, the purchase price demanded by entrepreneurs will undoubtedly rise, while about half of the privates offered to the public through IPOs declined in the “after-market”. One clue this phase may be coming to an end is the SEC demanding more disclosure from this sector. (Nothing like the Police showing up after a crime is committed.)
2. There is a trend of financial intermediaries merging into larger organizations. At some point the larger intermediaries will demand a bigger slice of the profits of the account.
3. Governments are concerned about a large portion of the voting population still without any, or sufficiently large, retirement packages.
4. With more pressure from clients or their agents, fees may come down, regardless of inflationary increases cutting profit margins.
5. An activist government may force advisory firms to go into less profitable businesses.
6. Some large settlements may be awarded by activist courts.

I believe the current management is aware of these and other risks, but bad things can happen to all of us.

Question?

What are the non-present risks that could hurt your investments?  

  

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

https://mikelipper.blogspot.com/2022/02/successful-investing-expects-unexpected.html

https://mikelipper.blogspot.com/2022/02/we-are-progressing-weekly-blog-721.html

https://mikelipper.blogspot.com/2022/02/building-long-term-investment.html

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 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.