To Win Long-Term, Learn From Great Presidents - Weekly Blog # 928

  

 

Mike Lipper’s Monday Morning Musings

 

To Win Long-Term,

Learn From Great Presidents

 

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

Losing is Part of Winning

In the US, we celebrate Presidents Day on Monday. A typical US compromise that solved an immediate political problem and ignored the long-term implications that would have benefited all, particularly investors. Numerous Americans wanted to celebrate the birthdays of two of our greatest presidents, George Washington, and Abraham Lincoln. However, perhaps for economic reasons the political leadership decided to celebrate just one date, picking neither President’s birthday but continuing to support the travel and retail shopping industries by requiring Presidents Day always be celebrated on a Monday.

 

What these politicians lost in their efforts were critical learning experiences. In terms of opposed contests, both leaders lost more than they won. Washington in military battles and Lincoln in elections. Unlike many of us, they learned from these defeats. (As Warren Buffett said, losing is part of winning.)

 

Applying Learned Experiences to Portfolios

I learned a lot at the racetrack, but my objective was to finish with more money than I started. Washington wanted the rebellion to survive and by so doing he would force the superior power to concede defeat. (The British marched out of Yorktown to the tune “The World Turned Upside Down”.) Lincoln preserved the Union. Both Presidents needed selective reserves to accomplish their goals.

 

Applying these lessons to portfolios, I am a believer in taking risks on individual investments but avoiding the risk of a complete wipe out. In a study of million-dollar retirement accounts at Fidelity, the winning results used both stocks and bonds. I would rename the components equity risk and interest rate/survival risk.  

 

What I found interesting was the median account allocation of 70% stocks and 30% bonds for these millionaires.  Currently, I have about 70% in funds/direct equities and 30% in reserves, with about half of that in cash or bonds/notes under two-year duration.

 

The Logic Behind a 70/30 Portfolio

Looking through a collection of portfolios over time and dividing them into 10-year performance slices, it appears 80% of the equity slices go up in value. As a fiduciary, I assume a more conservative approach with the 70% equity risk.

 

I consider the overall portfolio to be a 20/20 portfolio, with the “normal” equity risk assumption being 70%. This permits market movements of 20% in either direction, without needing to change the basic balance. On the downside, if the portfolio balance reaches a point of having only 50% in equities, I would add 10% of capital to equities. On the upside, once equities reach 90%. I would rebuild a 10% optimistic reserve.

 

Not Built in Yet

We live and invest in a multi-speed world. Due to electronic processing most commercial and agricultural world price trends are impacted at an increasingly fast speed. Some of these trends reflect fast reactions to price movements, which cause geographic rotation. Through last Thursday on a year-to-date basis the S&P 500 generated a -0.07% loss and is essentially flat, with Europe gaining +4.51%, Japan +13.96%, Australia +3.8%, and Canada in local currency +2.56%. In most of these countries there are local and multi-national producers who experience similar problems of prices representing different costs, size-weighted efficiencies, local preferences, and legal/tax regulatory differences. Customers and investors are quick to rotate their actions.

 

On a longer-term basis the world is going through a period of declining fertility rates, impacting local demand in the short term. On a longer-term basis there will be fewer workers, which will result in retirement capital being reduced and securities markets altered. Organizations active in the markets are changing. On the one hand there is a desire to become bigger and serve more firms and people, while others want to increase profitability and remain small enough to grow profits per key player.

 

As populations age, they become more expensive to maintain, particularly beyond their working ages.

 

In Conclusion:

We should all learn from George Washington and Abraham Lincoln and adapt to change with sufficient humility, so we don’t become bystanders passed in the fast parade hurtling through.

 

Thoughts?

 

 

 

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Mike Lipper's Blog: Strategically, Time to Think Differently - Weekly Blog # 927

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Anticipation Pays; Deliveries May Not - Weekly Blog # 907

 

 

 

Mike Lipper’s Monday Morning Musings

 

Anticipation Pays; Deliveries May Not

 

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

 

 

Since last December the bulls have been calling for a drop in the Fed interest rate. Some anticipated an interim pay-off near the close on Thursday when the last print on the 10-year yield failed to maintain its announcement high, fulfilling the dictum of selling on the news. The number of Friday’s declines on both the NYSE and NASDAQ were above the number of rising prices.

 

With the much-expected rate cut I found it interesting that the sample surveys of the American Association of Individual Investors (AAII) were bearish for the last three weeks. The six-month projections stayed in the 40% range for all three weeks (42.4%, 49.5%, and 43.4% respectively). In the latest week, which probably did not benefit from Thursday’s rate cut, the bullish estimate of 41.7% was slightly below the bearish call.

 

The explanation for the three main market indices rising to record levels from their April lows this week was the familiar “FOMO”, fear of missing out. I suspect traders sharing that impulse were largely housed in retail-oriented wealth management arms of brokerage firms and non-trust departments of banks.

 

The battle for investment survival is being waged by armies marching under the “FOMO” banner, as well as others withholding their purchase orders upon reading the economic data. There are two ammunition arsenals safeguarding the non-buyers, the declining number of job-openings and the rise of non-US traded equities benefiting from the fall of the US dollar. In April there were 158,000 jobs added, which fell to 22,000 in August. Barron’s shows the investment performance of 14 local markets in Europe and Asia each week. This week Europe had 4 risers and Asia 8. Asian and Emerging Market funds were most prominent among the better performing mutual funds this week.

 

On a longer-term basis there are a number of worries about investing in US markets:

1. The US market is becoming more speculative, with year-over-year NYSE share volume rising 16.24% and NASDAQ 68.97%.
2.  The current administration appears to want to reduce the independence of the Federal Reserve.
3. The President and SEC are floating the idea of switching from quarterly reporting to semiannual. Both ideas will make foreign-traded issues more attractive than they are now.
4. The drive to include non-publicly traded securities in retail accounts, particularly retirement portfolios, is expected to increase the risk of losses.
5. The London edition of the Financial Times devoted a full page to the headline “A new era of McCarthyism?”, showing a picture of President Trump and the late Senator McCarthy. This reminds me of sibling rivalry between an older brother and a successful younger brother. With a number of listed London exchange stocks moving to the US there is risk to a portion of the London market.

  

With the US stock market indices but not the average shares at record levels and the economy open to question, please be careful.

 

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Mike Lipper's Blog: Selected and Casual Road Notes - Weekly Blog # 906

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Mike Lipper's Blog: Appeals Court Rules (7vs4) Against Trump, but Life Goes On - Weekly Blog # 904

 

 

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Professional Worry Time vs Amateurs’ - Weekly Blog # 865

 

 

 

Mike Lipper’s Monday Morning Musings

 

Professional Worry Time vs Amateurs’

 

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

 

 

 

Domestic Numbers of Concern

Recently, the three main stock indices reached record price levels, causing a lot of electronic babble and printers to spill ink. While the amateurs ate it up, the “pros” worried about different sets of numbers.

 

The worrying numbers came from the domestic fixed income world, where risk-spreads (interest rate differentials) were extremely narrow. The US Treasury spreads between 2-year and 30-year bonds narrowed to 32 points. I have difficulty finding a scenario over the next thirty years where this is appropriate.

 

Barron’s data allows analysts to look at a similar narrowing between 10-year high grade bonds and similar medium grade bonds. Comparative yields have narrowed to 44 basis points from 116 points a year ago.

 

What may be supportive of these concerns is the latest American Association of Individual Investors (AAII) sample survey. The sample survey has a good long-term record but is often wrong in assessing the outlook for the next six months at turning points. The most recent survey shows 37.1% of the respondents being bullish and 38.6% being bearish. (This is the first time in my memory that the bears have been stronger than the bulls. The sum of the two estimations equals 75.6% of the sample, reflecting the intensity of the views on both sides. A normal distribution would be about 40%, 30%, and 30%.

 

International Concerns

Strange to say, not everyone in the world is as intensely focused on the US stock market. There is a small group of activists concerned enough to maintain active communication with the person who can disrupt the economy and politics---President Trump. The fact that these “heavy hitters” find it necessary to maintain contact is another risk investors should be concerned about.

 

Researching successful small companies internationally is much more complex than doing it domestically. Many small companies are still effectively private and are led by an entrepreneur. In many cases these organizations cross borders easily, initially through industry contacts like many of our own companies. Part of the skill set needed is identifying how the countries really work. Families are much more important in mainly multinational countries. Critical financial arrangements initially start with private sources. Most small companies expect to be multi-generational, even though they can be bought by the right large company at the right time.

 

 

 

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Mike Lipper's Blog: SPORTS FANS SELECT CABINET & OTHER PROBLEMS - Weekly Blog # 864

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4%, 5%+, Changes, Disruptions, Faulty # # - Weekly blog # 748

 

 

Mike Lipper’s Monday Morning Musings

 

4%, 5%+, Changes, Disruptions, Faulty # #

 

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

    

 

Particularly Difficult to Invest 

Pundits have an advantage over real investors. They eliminate any factors contrary to their proclamations. I don’t have that capability in deliberating how to invest for the multiple futures faced by my accounts. The somewhat obtuse title of this blog is a shorthand list of my concerns.  

 

4% 

4% is my conclusion after listening intently to Chairman Powell’s less than 9-minute speech concerning the Federal Reserve Board’s direction. While it did not reveal much new, it reinforced earlier comments made at the last press conference. It reaffirmed my belief that the minimum interest rate that should be expected is 4%. My belief is anchored in a co-incidence. Most money in the market is invested to meet retirement and estate needs. Long-term research suggests annual withdrawals from these funds should be 4%, which implies leaving the on average basic capital intact after inflation and taxes. If that is the goal for both private funds and social security payments, it requires capital growing at least 4%. This 4% aspiration is higher than the current return earned by Social Security and other government funds. Thus, the basic requirement for a sound economy is 4% growth. 

 

The drop in stock prices on Friday was probably due to expectations the Fed would show signs of “pivoting” toward lower interest rates. Investors should not let wishes drive expectations! 

 

5%+ 

Reported general US inflation is running at 8% or more. Chairman Powell and other Fed leaders have indicated the appropriate Fed interest rate should be sufficiently above the inflation rate to assure consumers and others in the market that rising inflation won’t be a future problem. 

 

The current focus of the Fed and others in government is the belief that they can only accomplish their goal by reducing aggregate demand. This is what is taught at most universities. Advocates of this view have little if any experience in the commercial world. They believe in dropping the level of the water when a tall vessel approaches a low hanging bridge. I and others in the commercial world believe the bridge should be raised, probably permanently. 

 

In terms of current US inflation, the current administration is lowering the water. Energy is probably the largest single contributor to inflation around the world, yet the US government is curtailing its availability. Other constraints placed by the organs of government on a productive economy are various regulations. Without changes, odds are low the US will see inflation less than 5%, and it may be well above. 

 

There is a good chance that assets other than US currencies will appreciate when the Russian-Ukraine war ends and/or when the Chinese government is successful in growing its economy again. Thus, it is appropriate to assume the US dollar will decline in value at some point. Goods and services purchased from overseas will then be priced higher, adding to our inflation. 

 

Changes 

There are likely political power changes coming to the US from both the mid-term and presidential elections.  

 

In the current recessionary environment, we are seeing various senior portfolio management and asset management leadership changes. Many corporate boards of directors are unwilling to continue with their current top management, or even continue to allow their degree of independence. (This could be an early gift to slow moving “value” stocks.)  

 

Disruptions 

One influencer of goods inflation is inflation in the service sector. Customers in supermarkets and malls have changed their buying habits to get more value and less fashion from their purchases. This change has been noted by producers of consumer goods. They have reduced advertising support for some fashionable top-line merchandise. 

 

The reduced support has already led to lower expected revenues for the big five advertising agencies. Broadcasting networks are in turn worried about revenues from these advertisers. At least one network is considering dropping an hour from its prime-time programs. I suspect competition from cable and streaming channels is also chipping away at network audiences. 

 

Another disruption is life insurance sales being down from peak-levels during the pandemic.  

 

A final disruption is the value of real estate. Commercial real estate is carried as an asset on corporate balance sheets. For the most part it is carried at purchase price less “depreciation”. This gets to the heart of the problem. Accountants and asset owners don’t like being sued for inaccurate financial statements. Consequently, they carry their assets at costs less amortization of their purchase prices unless there is a rare contrary price available. 

 

Take an office building costing $1 million being “depreciated” $25,000 each year, straight line. At the mid-point of its theoretical life the property value would be listed as $500,000. The accounting rules would not permit raising the carrying value to $750,000 if a comparable property was sold at that level. Nor would it drop that valuation to $600,000, a drop of 20% if there was a lower priced sale later. Consequently, the owner would carry the building at $500,000 that year. Thus, there is a $100,000 “hidden value” that many “value investors” prize. 

 

Now, bringing the situation up to date. The present tenants have indicated that they only need 25% of their space due to work from home syndrome. They threaten that they will move out unless the rent is adjusted to their needs. If this were to happen in the midpoint year, the real value of the building might be $150,000, (25% of $600,000 if that price is still accurate.) The problem for an uninformed value investor is that this price is considerably below what the investor thought. 

 

Conclusion: 

These are uncertain times. While some of the uncertainties will be solved, they will not be solved at today’s prices. So prudent investors should move cautiously and probably divide their transactions into parcels for periodic transactions. They should not try to pick a bottom or jump on a sharply rising trend. 

If you have different views, please share.  

  

 

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

https://mikelipper.blogspot.com/2022/08/mikelippers-monday-morning-musings.html

 

https://mikelipper.blogspot.com/2022/08/time-to-prune-weekly-blog-746.htm

 

https://mikelipper.blogspot.com/2022/07/time-to-be-contrary-weekly-blog-741.html

 

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Pick Investment Period & Strategy - Weekly Blog # 737

                                    

Mike Lipper’s Monday Morning Musings

Pick Investment Period & Strategy

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

This is the 737th blog which shares my thoughts on different investment periods and strategies. They are different from each other and are partly triggered by Friday’s US stock market decline, which in the extreme took 10% off the average price of narrow industry groups.  The views expressed are for the beginnings of internal discussions, not final conclusions which I would be happy to discuss.

Last Week

The 8:30 am Consumer Price Index (CPI) shocked some market participants, but really shouldn’t have shocked those who’ve visited retail locations. From the opening bell until the close stock prices fell. A significant price gap developed between Thursday’s close and Friday’s prices. Most of the time, significant price gaps are closed in subsequent trading before a change in direction continues.

Bullish traders could be overjoyed by Friday’s price action, which showed a considerable increase in volume. They will look at the result as a successful test of an earlier low price.

During the coming week the Federal Reserve will have a regularly scheduled rate setting committee meeting. Prior to Friday’s price decline it was generally expected to be a 50-basis point interest rate increase. This may happen, although the key for the market is not the rate but the issued statement. Some think the market move may scare the Fed into raising rates higher or lower and could also change the announcement related to cutting assets on the balance sheet. 

Market analysts are focused on the price level of the S&P 500 (SPX), whose prior low point was in the low 3800 level. If it were to be breached, a “bear-market” would be called. Some believe the ultimate SPX decline could be in the 3000-3500 range,

Hopefully, what transpires doesn’t mirror Boeing’s launch of an essentially brand-new plane following their very successful 737. Early on, the new plane had some crashes.

July Numbers Difficult to Interpret

• Market sentiment was largely positive in the first half of June, then turned negative in the middle of the month.
• Interest rates on non-government paper rose as retail sales dropped.
• Government numbers focused on a middle of the month week and probably didn’t fully recognize the deterioration of conditions.
• If the very current sentiment continues, I expect the reports for June, published in mid-July, to show a further decline in sales and a gain in inflation.
• If the second quarter GDP is like the first quarter, it will be the second consecutive quarter of contraction, the definition of a recession. 
• For the latest week, six of the ten commodity rail-carload groups showed declines: Other -15.4%, Metallic Ores and Metals -13.5%, Petroleum and Petroleum Products -7.6%, Farm Product and Food -5.6%, Forrest Products -2.9%, and Coal -2.0%. Total Intermodal -4.4% and Total Traffic -2.8%. (As these represent sales to customers, they denote current market activity not building inventory by the producers.)
• The level of interest rates in part deals with expectations. Thus, read what Randy Forsyth in the current Barron’s wrote. “If interest rate expectations are still too low and earnings forecasts too high, don’t be surprised if stocks get sliced further.”

Stagflation

• The World Bank is warning that the global economy may suffer 1970s style stagflation. According to them, it is possible world growth could be close to zero over the next 2 years.
• There is a view in many “advanced” countries that the will of principal taxpayers is to not follow their spendthrift governments by increasing their debt load in a slowing economy.
• According to some economists, the US suffered stagflation between 1973 and 1982. (I started Lipper Analytical in 1973) 
• Frankly, I don’t fully remember the period as I was quite busy building the firm and growing the family, so I asked an associate to research which mutual fund peer groups did best and worst. 

For the ten years ended in 1982 the top 5 peer groups in aggregate were:

       Precious Metals        +346.74%

       Convertibles           +220.51%

       Small-Caps             +214.81%

       Equity Income          +181.63%

       Growth & Income        +156.10%

Except for Growth & Income, these funds groups did not attract a lot of assets. The growth in assets was below $1 Billion in total, indicating the bulk of the industry produced good savings products, but not great investments as a group.

The five worst performing peer groups were also not popular with investors. Their 10-year performance is shown below:

        Short US Government   -10.22%

        Natural Resources     +23.37%

        GNMA               +56.11%

        Financial Services    +57.15%

        Miscellaneous         +64.43%

• To find individual fund groups that were extreme performers we looked at the two best and worst for each year. Not surprisingly there were only a few repeaters.

The most consistent winner were Precious Metals funds, at the top five times but also at the bottom three times. This seems appropriate in a period of rising inflation. Not surprisingly, Global Natural Resources finished at the top for two years. (During periods of high global inflation escaping out of fait currency makes sense. However, one needs to recognize that a greater fool theory game is at work, requiring quick sales to avoid losses.) We don’t have enough history and court cases to determine whether crypto related assets are better.

Where Are We Today

We have had a remarkably productive ten years in the market, but recently there has been great damage done to the ten-year performance records. (Unfortunately, my data does not include Friday’s painful numbers.) To over-correct in looking at the ten-year mutual fund performance record, I have eliminated peer groups gaining less than 10% per annum. 

I found 17 peer group averages that produced compound growth rates from 10% to 16.96%.  They are listed alphabetically below:

Capital Appreciation   Global Real Estate

Consumer Goods         Health/Biotech 

Consumer Services      India Region

Energy MLP             Micro-Caps 

Equity Income          Mid-Caps 

European               S&P Index 

Financial Services     Science & Tech

Growth & Income        Small-Cap 

Global

I question whether many regional fund groups can continue better performance than selective global competitors for long periods. Past performance is a useful research screen but cannot be solely relied upon due to changing conditions.

One change due to both bank and market regulatory modifications is the level of trading desk liquidity. It is shrinking and depending on the size of the trading relationship, access is uncertain.

Another concern is the needs and desires of consumers conflicting with the political desire for jobs. Both European and US governments appear to prize job creation over consumer needs for the best products and prices. This trend aggravates supply shortages and causes unnecessary inflation

Unaddressed Trends Can be Problems

We have been told that demographics is destiny, yet we are not paying attention to the message it is sending. Liz Ann Sonders of Charles Schwab tweeted the following:

In 1952 the average global family had five children, now they have less than three. Following is the number of children per family in various countries: Niger 6.7, Nigeria 5.2, Senegal 4.5, Ghana 3.8, Pakistan 3.4, World 2.4, Mexico 2.1. The replacement rate in the US is 1.8 or lower and it’s 1.1 in South Korea (Within many people’s lifetime, India will have more people than the shrinking population of China. 

These numbers have long-term military, economic, and investment implications. What can be done about these trends?  One of the lessons from the US Marine Corps is to get the best possible troops on your side. Economically, the founders of Unicorns are the most productive people we have. (Unicorns are start-ups that become worth $1 billion or more.) The founders top 6 academic majors of these unicorn are in order:

Computer Science

Engineering

Business

Economics

Biology

Mathematics

Students who successfully take and complete these courses are used to precision and discipline. They learn at home or at an early age. We need more of these students to offset the eventual power of those growing societies.

Please Share Your Thoughts

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https://mikelipper.blogspot.com/2022/06/mike-lippers-monday-morning-musings-how.html

https://mikelipper.blogspot.com/2022/05/bear-markets-recessions-not-inevitable.html

https://mikelipper.blogspot.com/2022/05/falling-confidence-beats-numbers-but-be.html

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