Mike Lipper’s Monday Morning Musings
We Allow Our Investment Professionals to
be Lazy
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
The Indictment
Short-term investors are often
confused with speculators. While they may produce the most trades, long-term
investors own the most securities. This is why the financial media is jammed
with views of short-term consequences, e.g., the next announced move and
statement of the Fed.
Whatever the Fed does, the impact on
long-term assets will be minimal at best. The key numbers for long-term
investors in declining order of importance are:
- The
purchasing power in local currency at the planned terminal date.
- An
discounted valuation caused by a premature sale.
- Third
is the aggregate value of distributed income while the asset is held. This could
conceivably be larger than the first case on very long-held assets in a
generational transfer.
Most pundits would rather pontificate about
near-term prices than speculate on the three long-term numbers which are
difficult to guess and won’t be known until many years in the future. These
very long-term guesses are however what owners need in selecting the current
assets that should be owned. While it is almost impossible to determine the
exact future valuation, it is possible to come up with relative value ranges. In
many long-term portfolios there are bonds and other securities with contract
relationships. What is far from certain is the price and value of these
instruments.
Historically, possibly bigger but more
uncertain returns are earned from risker equity investments than from more
predictable bond-like instruments. Bonds are also characteristically less
volatile, but can only possibly recover their face value plus interest.
Nevertheless, the lure of higher
potential returns attracts investors to equities and with it higher
compensation for the advisors involved. This is the ballpark I choose to play
in. To do so I take the inherent risk of attempting to make reasonably accurate
projections regarding the relative performance of various equities and equity
funds.
The Playing Field
As most of our clients are US dollar-based
investors my primary interest is in US activities and how non-US actions impact
US beneficiaries. The following is a list of primary concerns I have about the
future of the US from an investment perspective. These current conditions are
rarely discussed by the popular pundits.
- Productivity
is declining, which means the US is producing less sales and profits for each
dollar of investment or hours of work. Productivity translates into long-term
price gains in the marketplace. In last week’s blog I noted that the S&P 500
Index had gained an annualized return of over 10% since 1871. Prior to Covid
the S&P 500 rose 9% per annum. We are growing even less this year. Depending
on which prediction you choose, the expected gain is between slightly above
zero and 7%. My guess is that “social spending” by industry and government has
cost us at least one percent. The FTC, reshoring, and energy policies are likely
costing at least another 1%.
- We have lost the drive to win a war and the related
peace after our conflict in Korea, Vietnam, Iraq, and Afghanistan. Our military
now has a social mission, not primarily a military mission. To win we must want
to win. Our current military is underfunded and not structured to win.
- Excluding
immigrants, we like China, are not growing our native-born population. This is
not going to help improve productivity. Before 2050 India will have the largest
population and by the turn of the century, Nigeria and possibly another African
country will likely be the leader.
- We
are likely to see a new generation of global political leaders, possibly with
more authoritarian tendencies. US industrial and commercial leaders will also change.
- US
schools are producing a generation of students who do not want to work hard and
effectively. Our leading STEM oriented universities will produce good managers for
a while, although some of the best will leave. That is too bad. Note the number
of top leaders who are foreign born or first-generation Americans. We shouldn’t
lose these leaders, we need them to replace some of the current politically
adept CEOs.
- China
is likely to remain the fulcrum of world growth, they work harder and smarter.
- From
an investment standpoint, private companies are growing faster than public companies
due to leverage and incentives. Incentives eventually lead to these companies becoming
publicly owned, which requires public markets to not be overly burdened by
government policies.
Restructuring How We Do Things
(The following is just one example of what
may occur)
Our medical/insurance complexes have
become gigantic bureaucratic political bodies, where patients are cogs in a
machine. For instance, a patient living in the UK who has been in remission for
over 2 ½ years is likely expected to return to the East coast to see his doctor
every six months. Why can’t he go to a UK medical location and electronically tie
in with a US facility. If these types of arrangements can’t be worked out, the
real estate implications are enormous.
These are the types of changes we are
looking to invest in.
Brief Initial Thoughts on Silicon
Valley Bank and Credit Suisse
Both were victims of their own
business mismanagement, poorly informed clients, and poor government/industry
regulation. I wonder in the long run if our society is better off letting them
fail rather than partially bailing people out. I don’t know if the victims learn
anything. More importantly, do investors in general learn to be more careful. I
am most concerned by the last group.
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