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

 

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

Mike Lipper's Blog: Dead Cat Bounce > Last Chance - Weekly Blog # 952

Mike Lipper's Blog: Long-Term Money Via Telescope, Not Microscope - Weekly Blog # 951

Mike Lipper's Blog: Before Focusing on Shorter-Term Reactions - Weekly Blog # 950

 

 

Did someone forward you this blog?

To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com

 

Copyright © 2008 – 2024

A. Michael Lipper, CFA

 

All rights reserved.

 

Contact author for limited redistribution permission.

 

 

Policy vs. Execution

In our world of almost instant communication of large and small problems, the percentage of arm chair generals, pundits and head coaches relative to those in the trenches has reversed from past history. Today there are many commentators on almost any given topic facing the government, the economy, a publicly traded business or a portfolio. There is a belief that the result would be perfect if only the correct policies would be followed.

For those of us who have played football, been in the tactical military, operated a business, sat on a non-profit board, or managed a portfolio, we know that execution is what determines the result. There are a number of appropriate sayings that capture this reality:

• “I prefer a bad plan well executed to a brilliant plan poorly executed.”
  
• “We would have succeeded except for .......”
  
• “I suspect that more touchdowns are scored in broken running plays.”
  
• “In the military, you only get judged on Plan B (or Plan C, D or whatever)."
  

EXECUTION AND SUCCESS

As we are currently in the political phase of our national news cycle, there is a lot of debate as to the correctness of certain policies. Because the highest order in politics is perversity, execution becomes the critical determinate of success. The current US administration is long on polemic policies, but has arranged for the future execution of those policies. For activities where there is current execution, the results are less than perfect. However, this malady is not restricted to the government sector.

As a manger of portfolios of mutual funds and hedge funds as well as a member of various non-profit investment and search committees, I am struck by those who are focused on policy and those who are focused on execution. I recognize I am forcing a black vs. white confrontation for demonstration purposes. Most people are desirous of having both good policy and good execution, but they begin their process of elimination from different starting points. Those who believe in policy usually use labels to encapsulate what they want, e.g. equities, fixed income, high quality, international, global, mortgages, hedge funds, private equity funds, etc. To me each of these labels is too encompassing. I find significantly different levels of large capital or income risk within each of these labels.

LOOKING AT LEADERS AND LAGGARDS

I prefer to first look at those that have done very well or very poorly, in other words, I look to the extremes. This bifocal approach is why Lipper Analytical Services was successful in convincing the press to show both the winners and the laggards in their periodic performance reports of mutual funds. This approach is not to bring condemnation to those at the bottom. My interest in looking at funds/managers at both extremes is to understand some common characteristics of the leading and lagging managers. Further, I am conscious that there is a great tendency of reversion to the mean, (the leaders move back to the middle or lower ranks and some of the laggards rise to the middle or higher). Often the leaders and/or the laggards do a much better job describing the current nature of the market than a policy label.

EXECUTION OVER POLICY

Each week we review the ten best and worst performing funds for periods of various lengths ending the week on a Thursday. Thus far, 2010 has been a difficult performance year for most managers as individual security selection seems to have trumped adherence to various investment objective labels or titles (policy). On a year to date basis through July 22nd, the ten leading equity funds included 2 Internet focused funds and 1 each of the following varieties: Colombian and Indonesian securities, a dedicated short-biased fund, a mobile telephone and transport fund and three broader based funds including a PIMCO Real Estate Real Return fund. On the other hand, seven out of the ten lagging funds were dedicated short funds, five of which used 2-3 times leverage and one was focused on real estate. As noted above, one of the leading funds also focused on real estate. Other laggards included funds focused on wind power, sugar as well as 20+ year Treasuries and the VIX index. Confused? I would suggest that most of the winners for the time period had superior selection skills in very narrow arenas, and most of the laggards were bettors against the markets, particularly against interest rates. During this period of time I would have been better off with those funds that had narrowly based selection skills than those who had an overall view on markets. Chalk one up for the executors over the policy types.

As a practical matter it is very difficult to find those managers that will execute well in the future. This investment risk can be managed by selecting a number of different funds that have demonstrated good selection skills in the past. This approach works well on the buying side of the equation. The problem is that many managers are normally reluctant to sell their winning positions, so they often ride their winners back down. The real skill of a professional manager of a portfolio of funds or a chief investment officer overseeing a portfolio of separately managed accounts is leaving somewhere near the top. Most of us find it difficult to leave a winner who has been very good to us. There are some managers who have a reasonable record in doing just that. A still smaller number have a history of repurchasing a past winner to play the cycle again.

Please share with me your experiences with this battle of Policy vs. Execution.

____________________________________________
To Members of Mike Lipper's Blog Community:

For readers who would like to stay current on my uncommon perspectives regarding investing and world markets, join the community by subscribing, at no monetary cost, just your time and interest as well as occasional responses. Simply click the "To Receive Blog via Email" box on the left-side of the screen.

For those already receiving my blog by email, if you would like to recommend this blog to a relative, friend or colleague, the sign-up is located on the left-hand portion of the screen at www.MikeLipper.blogspot.com.