Mike Lipper’s Monday Morning Musings
What Could Go Wrong?
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
To Predict is to Accept the Risk of Being Wrong
I read “The Psychology of Money” by Morgan House, which an
investment friend suggested I read. The book suggests that the first task is to
properly understand that most people view the future through the lens of their
personal experiences in their early years. I try to broaden out my early
experience of being born in the middle of the depression to a subsequently
divorced working mother. Additionally, I’ve spent a great amount of time
reading the history of many countries and cultures.
My view of the future is also influenced by my enjoyable
time at New York racetracks, where I tried to end most days with more money
than I started with. In essence, that meant comparing the posted odds versus
the probabilities of winning, or at least coming in second, which has its own
pool of bets that pay off separately. To accomplish that goal, I needed to guess
what could go wrong for each of the horses in the race. I had to accept that
the payoff was reduced by the track taking a portion of the winnings, along
with various taxes and other expenses. The track-payoff was therefore less
generous than the mathematical odds presented.
Nevertheless, there was the occasional opportunity to leave the track with more
money than when I arrived.
Using this approach, along with what I learned from both teachers
and other students at Columbia University, I developed an understanding of the
chance of specific future outcomes for various investments. The first thing I
learned was to eliminate most securities, most of the time. (This was like Warren
Buffett’s three sorting boxes of yes, no, and too difficult.) The formation of
my investment philosophy evolved from these experiences, allowing me to earn more
profits over time than losses taken.
Next Major Downslide
A study of financial history, and geology through the study
of rocks, reminds me that we are always subject to up and down cycles, which come
at irregular times. Since the earliest time humans have attempted to find a
reason for the cycles, either through supernatural causes, the elements Gods,
or men.
I begin with the view that the up and down slices of cycles
are in part a reaction to past opposite extremes, as well as new elements. We
are facing both today. The most frequent human reaction is the funding of
expansions. Initially, expansions are paid for by the reinvestment of past
profits, either by savers or revenue generators. Downslopes are often caused by
the unexpected requirement to pay back loans, like the type described in William
Shakespeare’s “Merchant of Venice”, which may have been a comment on Tudor
spending.
My analysis suggests that the growth of debt is a general
precursor to a depression. We may be in such a phase now, considering the
combination of recognized and unrecognized government debt and the growth of
private debt supplied by retail investors. This may be the reason the 30-year US Government Debt auction
reached a level this week not seen since 2001. It may also suggest that foreign
investors need higher rates to accept an increasingly unpopular government.
Typically, an event brings these types of worries forward.
Perhaps something like this week’s announcement of the quick sale of the Los
Angeles Lakers to cover other financial problems. Broader and more distressing
to me is T. Rowe Price’s statement that it will take a couple of years to stem
the net redemptions of their passive fixed income funds. The final sad note is an
IBES projection that the net income of the S&P 500 will only rise by 0.3% a
year from now at the end of the second quarter of 2027, before rising 17.3% the
following quarter.
Since we are approaching 90 years since the last depression,
the odds maker in me thinks the odds of another Depression is increasing.
What do you think?
Did you miss my blog last week? Click here to read.
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