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
Did you miss my blog last week? Click here to read:
Mike
Lipper's Blog: Is This The Week That Ends Instability? - Weekly Blog # 924
Mike
Lipper's Blog: How Much Longer Can We Avoid Thinking About the Long-Term? -
Weekly Blog # 923
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