Are History & Economics Books Closed? - Weekly Blog # 953

 

 

 

Mike Lipper’s Monday Morning Musings

 

Are History & Economics Books Closed?

 

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

  

 

 

The Reward for Analysis is Prediction

The payoff for analysis is plausible prediction, whether correct, wrong, or part of each. As this is an investment guess as to the future, it will at worst beget an emotional reaction, or possibly thoughtful disdain. On the other hand, it might suggest a future looking distinctly different than extrapolating the present, including the desires of those presently in power.

 

This may be an appropriate time to look forward to something different than the present and begin investing on the chance something different happens. The reason this is an appropriate time to express these thoughts is that those in power are only focused on the immediate and have closed the political and economic history books.

 

The following items point to a different kind of future:

Political Disruptions

• There is hardly any national government that is universally popular, which is different than being tolerated by a diverse population. At the moment the majority is not unified and lacks dynamic leadership.
• The current renter of the White House is waging a war which he believes he can end and in so doing can generate a political victory for him and his party. He should study the greatest UK leader of modern times, Winston Churchill, who lost power immediately after WWII to the Labor Party.
• While office holders are getting older, voters are getting younger and richer.
• While some media are controlled, increasingly more are not. Anyone, anywhere, may be able to reach individuals and groups.
• Both ancient Greece and Rome lost total control to an enlarged population. China had similar problems.

 

Financial/Economic Changes

1. The impact of air conditioning is coming to Europe, Asia, Africa, the Middle East, and Latin America. (In the US, the one thing the founding fathers did not foresee was the federal government existing in the humid swamp of Washington DC.)
2. The population of the US is likely to shrink without immigration, causing the national debt, social security, and Medicare to fall under pressure.
3. The rotation of the relative ranking of investment performance is likely to change. Over the last ten years only domestic and international science and tech funds have beaten the average large-cap growth fund average. This is from a universe of over 100 mutual fund category averages. (It is my bet that this will not be the case over the next ten years. None of the initial stocks in the first DJIA are in the current index.) The common denominator of successful funds is essentially the inclusion of computer-oriented products or services with substantial sales in the US. It is this concentration in a dynamic global world that will eventually lead to a rotation to other segments of the market.
4. Evolution has been part of life on our planet since the beginning of time. I believe only change agents have a chance of surviving longer. My accounts have two good examples of successful change agents, along with some mistakes. (These are not recommendations that should be made with complete knowledge of an investor’s needs, wants, and understanding.) Each of these companies began life pursuing other businesses and made significant purchases. Berkshire Hathaway started as   a money-losing textile mill. After Warren Buffett’s hedge fund bought it, Charley Munger taught him how to buy good companies at reasonable prices, which resulted in them building a great holding company. Recently, Warren appointed Greg Able as CEO of the firm. He is in the process of slowly turning Berkshire into more of an operating company by doing the following things:

• Appointed a Senior Executive over groups of single companies.
• Purchased Alphabet stock for cash, making it one of the firm’s 5 largest holdings.
• Purchased a home and community construction company and combined it with an existing builder of factory-built homes and a mortgage provider. (The country needs a major increase in the building of homes, and they will be part of the solution.)

Berkshire has not said anything yet about paying a dividend, although I think they will do so in a number of years. My thinking is based on Mr. Buffett’s statement that he and Charley were not running the company for the shareholders, but for their heirs. (It is already happening. I believe that a good bit of the stock owned by individuals for 50 years or more has been inherited on a step-up basis. These new owners of the stock will have different attitudes toward the company as they consider their own retirement needs. In order to keep this growing number of shareholders happy, it makes sense to pay a reasonable dividend.

 

The second stock already pays a mid-level dividend. The Thomson family controls roughly 70% of all shares of Thomson Reuters through their private holding company. They have made a number of dissimilar investments over time, including a commanding position in the North Sea oil field. Their principal business today is distributing critical data to law firms, accounting firms, corporations, and governments in the US, Canada, the UK, and Latin America. Thomson is the largest provider of this type of data, and they have taken their time converting their products to utilize “AI”. Their customary careful management has recently introduced “AI” driven products which have been well received, making good progress with both old and new customers. (Disclosure: For a few years Thomson owned the data of my firm, Lipper Analytical Services, but they recently sold it to the London Stock Exchange Group.) Thomson Reuters is similar to Moody’s, S&P Global, and other commercial data providers that we own.

 

Working Conclusion:

Change is inevitable and risky, but necessary, and worth the risk most of the time. 

 

Please share your thoughts

 

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Is This the Last Hurrah? - Weekly Blog # 945

 

 

 

Mike Lipper’s Monday Morning Musings

 

Is This the Last Hurrah?

 

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

 

          

 

 Preface

Hurrah is both a shout of victory and a political world about aging politicians, warning that the following election won’t be a happy one. (BTW it is pronounced Oorah in the Marines and Hoorah by the Army.)

 

I don’t know whether the reception for the largest IPO of all time is a sign we will not see larger market enthusiasm in the future. I am talking about both the size of the SpaceX offering and the further gains generated after underwriting.  What I do know that it was a record fundraise at a time when many non “AI” stocks are dealing with mediocre sales. Consumer sentiment is at its lowest on record going back to the early 1950s

 

More importantly, I am trying to find investments for the next “bull” market. My assumption is that we will experience a substantial rise after a major correction to the present market level.

 

The Process

The first thing I don’t do is look for clues to a different future by crunching GAAP numbers found in today’s annual reports or other regulatory accounting statements. To the extent present sales data may be useful, they need to be adjusted to match reality. For example, today it looks like semiconductor companies are doing very well in Taiwan and South Korea. Truth is, only some of their product sales are produced in their home country, with increasingly more in other countries. More importantly, I am guessing their ultimate sales are to US customers. Thus, investors are concerned that many of these so-labeled international companies are extremely sensitive to what is happening in the US.

 

Forward Looking Analysis (Guessing)

The example that I discuss should not be treated as a buy recommendation and should only be rendered knowing the economic condition, resources, and personality of the buyer. The case I will discuss shortly is a long-standing large position with a large unrealized potential tax liability, although the analytical thinking may also be appropriate for the reader.

 

The stock is Berkshire Hathaway. The news item is the $8.5 billion purchase of Taylor-Morrison Homes for cash, including the assumption of some debt. The initial size is about 1/3rd of Berkshire’s annual net free cash flow, excluding their large cash reserves.

 

The decision made by the new CEO of Berkshire was completed in matter of weeks and was applauded by Warren Buffet. The announced plan is to create a housing group combining Taylor-Morrison with already owned Clayton Homes, which manufactures homes at a lower price point. Taylor-Morrison builds communities of new middle-class houses as well as rental housing. There is a national need for more housing.

 

I believe this purchase is very similar to Berkshire buying See’s Candy, which was initially misunderstood by some as Berkshire going into the Candy business. They were instead going into the franchising business, which has been an excellent business for McDonalds. In this case they would be going into the home mortgage business in a major way, with a controlled sample.  Furthermore, this is a sign that Greg Able the new CEO of Berkshire, has different talents and proclivities than Mr. Buffet without the guidance of the late Charlie Munger.

 

This is an example of how to investigate the future. 

 

Let us know what you think about our views?

                                         

 

 

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

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

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This Weekend’s Learning Sources - Weekly Blog # 939

 

 

 

Mike Lipper’s Monday Morning Musings

 

This Weekend’s Learning Sources

 

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

 

          

 

Identifying sources of learning

One of the main differences between us and most animals is that our brains are larger, which hopefully means we can learn more. The end of this week supplied three sources of learning. The three teams of instructors were: Tim Cook (Steve Jobs), Berkshire Hathaway’s Annual Meeting with shareholders (Warren Buffett/Charlie Munger and Greg Able), and the Bettors and Horses at the Kentucky Derby. From each I can learn a lot. Matter of fact, each could be a whole semester at Business Schools instead of what they are currently teaching.

 

Tim Cook (Steve Jobs)

At the end of the so-called work week Tim Cook conducted what was his last quarterly meeting for shareholders and analysts of Apple (*). He focused on the company’s critical relationships with customers and what is owed to them. He stressed what Steve Jobs taught, the betterment of the users’ lives. These were the critical thoughts passed onto the oncoming new President of Apple. We should pass these views onto all we deal with, focusing less on what they paid us and more on what we did for them.

* Owned in personal and client accounts.

 

Warren Buffett/ Charlie Munger & Greg Able

Mr. Buffett spoke to many of the shareholders attending the annual Berkshire Hathaway (*) meeting, both in person and electronically. His advice for people reaching 50 years or older was to switch their primary investment focus from making money to capital preservation. He emphasized saying no, particularly to not well understood new investments. (I do not own any “AI” stocks directly, but there are many in mutual funds I own. The key to their future is what they have yet to produce, not what they are selling today.) He believes investors in retirement should prune their holdings and try to explain what they own to their heirs, feeling it is more beneficial to focus on how the inheritance should be used rather than the intricacies of what is owned.

* Owned in personal and client accounts.

 

Greg Able is the new President of the company and is focused on improving the operations of the company. When the talented Chief Financial Officer transitions into retirement, he will be replaced with both a CFO and a new lawyer. Furthermore, for the 31 private companies owned by Berkshire, he has appointed a trusted internal executive as leader. Instead of doing just financial oversight, he will be reviewing the operations of the formerly private companies. Good policies of the past will be reviewed to see if they are right for now.

 

My personal view is that there are two major trends which we did not have to deal with in the past, but which could be much more important in the future. The first is one of the causes of financial and economic cyclicality resulting from not repaying debt on time and at full value. Defaults on debt have led to depressions in the past and have been the cause of unplanned contractions.

 

In the decade of the 1920s into the early 1930s society encouraged the global extension of debt at the retail level, including its use as a defense against tariffs (Smoot Hawley).  Currently, we have an expanded federal debt led by someone who needed to renegotiate his own debt. Our government encourages investing retirement capital in debt. The national debt is larger than the GNP. (Old debt has a due date, while GNP is produced each year.)

 

The second dangerous trend is the value of the dollar in world trade. As debt grows, overseas investors value it less. Meaning, it not only becomes more expensive for funding our debt, but also for paying for imports of food, clothing, and raw materials. We are better positioned than many other countries who are in worst shape, but not all. Asia, which has a younger population and a disciplined workforce, is in better shape. Higher inflation leads to lower long-term value of the currency. One measure of inflation not issued by our overworked government is the ECRI Index of Industrial Prices, which was up 140.35% this week for the last 52 weeks.  

 

Kentucky Derby

I brought this on myself by stating that I learned the basic tenants of analysis at the New York Racetracks. A subscriber asked who I was betting on in the race. Where do I begin? Perhaps with two axioms. First, as with most things in life, short answers are often wrong. The short answers are wrong because they are stated without limits and conditions. That brings us to the second axiom, I don’t like losing. I don’t like losing because it is a double loss. The first loss is the sum wagered, and the second is the loss of funds necessary for future betting and other things.

 

There are two negatives against betting at the track. First, the track takes a cut of all bets and there are personal expenses of travel, admissions, and food. Second, as a game of chance it is rigged because of the track’s take. Additionally, winnings are taxable at federal and state levels. There is still another drawback, about 30% to 50% of the time the lowest yielding horse wins. Most of the time those winnings are not large enough to offset losses and expenses incurred. I address this problem by limiting the number of times I bet, usually 3 out of 9 races and rarely at the lowest odds. The advantage of this approach is staying away from betting at the lowest odds, which are the most popular horses.

 

If these issues did not cause you to find other things to bet on, the elements of the Derby might. First, the race is only for three-year-old horses. While horses are born for the record throughout the year, under racing law all horses are born on January 1st. Some horses start their racing history at 2 years old, but many do not. By the time they are three years old they are adolescent. (From a scientific standpoint it would be useful to know the actual date of birth. There is poor but available information as to the number of official races the horse has run. In terms of the Derby, the range I heard was 1 to 4 races.) For those of my age, I am reluctant to take adolescent horses and most humans seriously.

 

So, after all this I did not place a bet on this year’s Derby. Most of the time I am not interested in races for three-year olds that are run any earlier than June, which starts with the Belmont Stakes race. These races are also a bit suspect because the course has been altered.

 

I would not have bet on the winner this year. However, the trainer deserves to be congratulated as she was the first woman trainer to win the Derby. The night before she had a dam which won the Kentucky Oaks with the same jockey who won the Kentucky Derby. Quite an accomplishment.

 

All of this shows I am still a student and hope you are as well.

                                        

 

 

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Mike Lipper's Blog: Watch Out for the Four - Weekly Blog # 938

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Slow Moving in a Fog - Weekly Blog # 888

 

Mike Lipper’s Monday Morning Musings

 

Slow Moving in a Fog

 

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

 

                             

 

Weather Predictor’s Real Function

One should pity the role of weather predictors who must often predict changes in the weather, either by hour, day, week, month, or year. One or more of their outputs are frequently wrong because something changes. As a professional chartered financial analyst (CFA) I am both grateful and sympathetic to their plight.

 

The only thing they can be confident of is making securities analysts look good, having a somewhat worse prediction record than the analysts. The primary reason they are wrong is that something changes. As both surviving analysts and politicians are prone to say, when the facts change, my views change.

 

To safeguard my self-confidence, I rely on a weather condition. A fog has descended on the economic and securities playing fields. We will be in such a situation this week and looking forward to the future. Since managing and owning a portfolio, “facts/sentiments” change every minute, hour, day, week, month, or year. It is more like navigating a vessel than a piece of statutory. Dangerous risks in a fog are unidentified shoals or obstacles, as well as warning elements which occur randomly.

 

Friendly Signals

• Many Chinese believe that 888 is a lucky sign of the future.
• The American Association of Individual Investors (AAII) latest weekly sample survey showed a decline in bearish readings and an increase in bullish readings.
• 54% of the weekly readings of the prices of indices, currencies, commodities, and ETFs in the WSJ were higher.
• Unusual trading volume on Friday was the highest of the week.

Warning Signals

• The Financial Times noted that “Institutional Money Managers are trimming US exposure...”
• The US Federal Government is expected to cut-back “Watchdogs at the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency and the Securities and Exchange Commission.” (Beneath the surface, there appears to be concerns about the soundness of small banks and private debt instruments.)

 

Mixed Messages

When a stock price drops about 1% following a corporate announcement after it was expected to rise, either the expectation was wrong, or some didn’t understand the message. This is particularly true when the stock and announcer are both among the best practical educators in the investment world. I am referring to the drop in the price of Berkshire Hathaway* after Warren Buffett announced his intention to ask the Board to approve his resignation as CEO, effective year-end.

*Berkshire Hathaway is held in both client and personal accounts and is the largest holding in some of the later accounts.

 

Warren Buffett has said for years that the stock price would likely rise after he retired, and I shared his views for a couple of reasons. First, his retirement would eventually happen and second that he was running the company for the heirs of the shareholders. With that in mind, he ran the company in a low-risk fashion. In many, but not all ways, Berkshire was a trust account for the shareholders’ heirs.

 

His long-term friend and vice-chair, the late Charlie Munger, taught him not to buy cheap stocks on a price basis, but good companies at fair prices. Charlie called Warren a learning machine because he learned every day, particularly from losses. This reinforced the teaching of Professor David Dodd at Columbia, who taught the Securities Analysis course based on his experience in the Depression. This was perfectly appropriate for the times, and he was still focused that way in the mid-1950s when I took his course.

 

The course was essentially an accounting course using financial statements. It took me a number of years to learn the other key lesson, the business analysis of the issuer. This knowledge was one of Charlie Munger’s contributions to Warren. After Charlie passed a few days before his hundredth birthday, the likelihood of Warren’s own retirement became more likely.

 

His retirement became possible with the appointment of Greg Able, who is much more of an operating manager than a securities manager, which Berkshire neglected in my opinion. Recent sellers of the stock were likely worshipers of “Mr. Buffett” or possibly the heirs of long-term holders who now felt free to capture the assets for their own needs rather than wait for the passing of their relatives. They have probably never read anything about Berkshire’s investment thinking. Thus, I do not believe they are informed sellers.

 

How do you see things?

 

 

 

 

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Mike Lipper's Blog: Significant Messages: Warren Buffett to Step Down by End of Year, Other Berkshire Insights, and Tariffs won't deliver - Weekly Blog # 887

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Significant Messages: Warren Buffett to Step Down by End of Year, Other Berkshire Insights, and Tariffs won't deliver - Weekly Blog # 887

 

Mike Lipper’s Monday Morning Musings

 

Significant Messages: Warren Buffett to

Step Down by End of Year, Other Berkshire

Insights, and Tariffs won't deliver

 

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

 

                             

You have probably already heard that Warren Buffett will step down as CEO of Berkshire Hathaway by the end of the year. Warren announced this to thunderous applause at Berkshire's annual meeting on Saturday afternoon. I am not surprised. At the meeting, which is the first we have not attended in many years, his answers to many questions were more statesman like, recognizing the scope of problems facing both the country and the rest of the globe. He referred to his Father's only political defeat as a Republican Congressman and subsequent re-election. Greg Able spoke purposely, answering an increasing number of questions. He will succeed Warren as CEO.

 

The following brief comments were delivered at the meeting largely in chronological order.

1. Berkshire expects the relationship with Japanese trading companies to likely lead to more Japanese acquisitions, probably in Yen.
2. Berkshire was in discussion for a $10 billion deal recently. Buffett indicated that he thought with Abel as CEO larger deals are likely, with more communication between the units.
3. Currently, the companies are not using AI for Real Estate and they are behind in using it for GEICO.
4. There is a global push for weaker currencies, which is a negative.
5. Life Insurance is different from the Property/Casualty insurance Private Equity is using.
6. Berkshire's stock price has fallen 50% three different times.
7. In the latest quarter, the prices of 21 subsidiaries rose and 29 declined.
8. There were no repurchases of stock.
9. Warren pays more attention to balance sheets than income statements. He is particularly interested in generation of free cash flow. He also believes quality starts from the top. There was quite a discussion about utilities, coal, and fires. The various states and political interests need to decide what they will authorize.

 

Tariffs Are Not the Answer

Far too many people believe that imposing Tariffs on various items of world trade will solve the problems of individual countries. George Calhoun, a Director at the Stevens Institute of Technology and a contributor to Forbes Magazine, raises critical questions in two articles in Forbes. (George and I serve on a board committee at the Stevens Institute.) For brevity purposes I will briefly review the first part of his second article:

 

Will higher tariffs cause inflation?

Prices will rise.

 

Alternative view:

Currency shifts neutralize price increases

 

Mitigating factors: Caveats, Fudges, & Assumptions'

There are at least 14 various measures of annualized inflation.

 

Is it really inflation?

"High prices are not the same as inflation"

There is confusion between the rate of change and the level of prices. (I may include the perception that there is no change in the quality of product or service and time of delivery.)

 

Tariffs affect only a small portion of the "The Consumer's Basket"

(Does substitution change the value of the product?)

 

(I am happy to send the second half of George's article to any subscriber.)

 

The Trump Angle

From the very first time the President introduced the use of tariffs to correct the imbalance of world trade, I believed he was doing it to force negotiations. It is already clear he will change the size of barriers, due to the manipulation of currencies. (See currency shifts above.)

Only the most senior officers can deal with these types of items.

 

 

Question: As usual I would like to hear your views.

 

 

 

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Mike Lipper's Blog: A Contrarian Starting to Worry - Weekly Blog # 886

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My Triple Crown - Weekly Blog # 783

 

Mike Lipper’s Monday Morning Musings

My Triple Crown:

Berkshire, Coronation, Derby, plus analytical insights

 

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

 

 

 

Berkshire Hathaway Annual Benefits

One of the advantages of owning shares in this unique company, both personally and professionally, is having the opportunity to learn from Warren Buffett, Charlie Munger, Greg Able, and Ajit Jain. The side conversations with a number of deeply involved investors and managers is an added benefit. For me, my wife, and my son Steve, this is truly an educational experience.

 

In terms of Berkshire, the following is a brief list of short-term (one year) comments:

1. The “float” is expected to be higher than in 2022. There should also be earnings from the railroad.
2. They have heavy property insurance exposure in Florida real estate.
3. GEICO will not be getting the full benefit of the switch to fully automate until at least 2024, possibly longer.
4. The stock is selling below “going-concern value”, suggesting it’s a good use of cash, particularly for heirs.

 

Coronation

While the coronation of King Charles III and Queen Camilla is important to many in the English-speaking world, it is also important to those of us entrenched in the investment world. King Charles produced a more modern version of the over 1,000-year-old coronation with all its pageantry and significance. Globally, he should give us hope we can remodel a financial system showing serious signs of disarray, with the inability to produce good value for all direct and indirect participants. Among which are the problems related to regional banks, commercial real estate, government sponsored inflation, inadequate education, inefficient healthcare, and getting the optimum benefits from layoffs. (More on the latter subject later in this blog.) We should learn what we can from King Charles’s discipline, especially his ability to make painful decisions with a clear view of a desirable future.

 

Kentucky Derby

The Kentucky Derby is America’s most famous horse race, which is unfortunate. The entrants in the race are 3-year-young horses with very little experience. This year’s winner, like many others in the race, had only raced 3 times and had only raced once at the Derby’s distance.  As most blog readers have learned, I believe whatever analytical talents I may have, I learned at the New York racetracks.

 

The payoff after both the tax authorities and track takes their share is important in figuring out if a particular horse is worth betting on. It’s a critical element of my handicapping skill, which I carry over to my financial analysis responsibilities. Not surprisingly, Warren Buffett also learned a great deal from attending local racetracks. One can see this when he explains the key to Berkshire’s insurance success, which is getting the right spread between the rate charged and the risk of loss.

 

One of the determents in this analysis is who you are competing against. This was an unusual Derby in that a number of horses were scratched. The betting crowd (the market) was left without a strong preference or favorite, much like one of the five largest market-caps in most sectors. At the track, the odds-on favorites are often 2 to1, or less. In this year’s race the winning odds-on favorite was 4 to 1. This should have been an alert to bettors that there was a low level of confidence in the crowd’s or the market’s choices. Somewhat similar to a number of market periods we have gone through recently. This filter might have suggested giving a more earnest look at horses with longer odds. Opening up the possibility of identifying a horse with 9 to 1 odds who finished first barely beating the second finisher, a horse with 5 to 1 odds. This type of behavior is why I often favor less popular investments, including small-caps and companies with somewhat blemished records. Particularly when there is a change of jockeys or other key managers. The keys to success in this type of thinking is not the win vs. loss ratio, but the number of dollars won or lost. Or if you prefer, Berkshire’s rate vs risk.

 

Analytical Insights

Hardly a day passes without the media reporting on a company with a new layoff. This is not newsworthy because of the number of people being laid-off, but because it’s happening during a period of high employment where there’s a surplus number of job openings relative to the number of people unemployed. Clearly there is an imbalance, or phrased another way, the people unemployed are different that those employed.

 

This condition requires careful and thoughtful analysis based on incomplete data. I suggest disaggregating the layoffs by presumed causes. The following is a list of types of layoffs and their significance:

1. LIFO (Last In, First Out) is usually directed by HR people from an easy date of employment list, without any further consideration. (I avoided one such occasion personally by going to a senior partner of an institutional brokerage firm which had 5 junior analysts. I pointed out that the likely salaries in aggregate were roughly equivalent to that of one aging but knowledgeable senior analyst. Perhaps my logic or guts worked, all five junior analysts were saved. I left the firm for another opportunity soon thereafter. Of the 4 that remained, at least 2 became productive firm partners.)
2. The opposite approach is sorting by perceived talent and keeping the best. In effect create a talent bank.
3. Friends for life. As I moved up, I recognized that some talented individuals did not fit where the firm was going. I suggested they find a better place and they became friends for life.
4. A layoff can be an essential part of a plan to move an operation, disposing of an activity that no longer fits.

 

Good analysts should try to determine which of the four alternatives most likely fits their described motivation. The LIFO layoff is only helpful in improving overall short-term productivity, as it does not make the remaining workers feel good about working for the employer. This may be unavoidable if the company is a union shop with built in official or unofficial rules governing layoffs. If so, the employer has deeper problems. 

 

In Conclusion

I had a good learning week, and I am happy to discuss my views with subscribers. Whether you agree or not, I can learn from you.

 

 

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