Introduction
Because most people in the
Fifteenth Century were focused on the difficulties of their lives, it was easy for
them to believe that they and their neighbors were the center of the world.
Their view of the world was limited by the height of the tallest mountain and
the depth of the deepest valley. Thus it was easy to believe in boundaries that
they could see. From this vantage point it was simple to believe that the earth
was flat and was the center of the universe. To some degree investors and
political leaders have the same view today. We have been trapped in a flat
general stock market that experiences significant daily to weekly volatility
before reversing to attempt to breakthrough either on the up or downside.
Low
Volume Trading
These movements use up
a lot of energy in expressing hopes and despairs. Having grown tired of this
dance to nowhere, many investors have shut down their transacting activity. At
most the low trading volume absorbs the net additions to investors’ cash flow
or provides a trading arena for those who believe that they possess superior
trading skills. Thus, we have created an investment audience who believe that
not much will dramatically change until they perceive a major and probably
unknown stimulus. They have returned to the flat earth view.
Open
Your Eyes
One of the jobs for the
long-term strategic investor in companies, securities, and people is to examine
daily inputs of change to discern what could change and what are the odds on
that change would occur. One of the lessons
that I learned through handicapping thoroughbred horses for a specific race was
to deal with absolute uncertainty by assigning relative odds on each potential
bet and comparing my personal-generated odds compared with other
players/investors to find where I saw a better than normal opportunity that
others did not see. Therefore I learned to look for early indicators of transformative
disruption that others did not take into consideration. Like some of those in
the Fifteenth Century, I looked far wider than others. I looked beyond the
statistical measures such as reported earnings, present yields and last
transaction prices. The following items are what I am now seeing.
The
Downside
The first thing any
investor should do is to look at the odds on losing money. In every transaction
there is a buyer and a seller. Each side has his or her own motivation for the
trade, but both are forcing themselves to do this trade at this time and at
this agreed on price. Both could be correct for themselves because they have
different time frames for their judgments and/or different plans for their
money.
Lots
of Great Sales, Few Great Buys
Having both bought and
sold securities and financial service companies I sense the buyer of companies
is more long-term oriented particularly if the buyer believes he or she can
dramatically improve the profitability of the seller’s merchandise. The seller
is more currently oriented, feeling that the price offered more than adequately
pays for the present risk and rewards available. As someone who has been
following the financial services business for more than fifty years it is my
impression that there have been relatively few great buys and a lot of good
sales. Today there is an increase in the number of insurance-related and data
services providers that are selling out, often for cash and some stock. Broadly
speaking, financial services is only about one-quarter of the available stocks,
however the business of financial services is critical to the workings of all
economies. Therefore, to me the odds of a security price downturn in the near
to intermediate term is going up. This is reinforced in the fact that the number
of business start-ups is way below what would have been expected after a six
year economic expansion. Should you
care?
This focus on the time
of judgment combined with operating conditions that are funded by investments
is why I have trademarked the name Lipper Time Span Portfolios. The concept
rests on four portfolios of stocks, funds, and managers. The first or
Operational Portfolio is designed to fund current operating needs for a period
of a couple of years. As a downturn may not recover within this period,
concerns about a downturn are very important. The normal hiding places today like
short-term high quality paper unfortunately do not pay enough to cover at least
my perceived level of inflation, particularly after all taxes. Thus, some level
of equities should be included, but with a manager or investor that will
quickly liquidate once a downturn has begun. We will focus on the other three
portfolios as part of the upside discussion that follows.
The
Coming Upside
History suggests that for
America, there will always be an upside. The only question is when will it
occur and will it happen as a breakthrough of the upper limit of the current
flat market or will we experience a once in a
generation breakdown first. I remain optimistic and reasonably fully invested
in equities and equity funds. I have four reasons for my optimism.
The first is based on
all the exciting research technology on and off the campus at Caltech as well
as what I hear about Carnegie Mellon. The marriage of technology with the
biotech world will lead to faster and better treatments for many of the world’s
debilitating illnesses and untimely deaths.
The second reason which
is very short-term is based on data from the American Association of Individual
Investors, which surveys its members frequently. The latest AAII survey
displayed in Barron’s
shows only 21.1% Bullish and 40.7% Bearish. These kinds of readings often occur
at reversal turning points.
My third reason is
based on recent developments in the commodity markets. The performance of many
commodity managers for the period ending in June and extending into July has
been extremely poor. Many investors are fleeing these funds with a number of
the funds closing. Commodities are priced based on their scarcity value. With
many commodity producers withdrawing their capital from the production of
various commodities, and large numbers of skilled and semi-skilled labor being
laid off, eventually supply will sink below demand - especially when global
demand picks up. At the racetrack occasionally a long shot surprises and comes
in first. In some races it makes sense to look for long shots when the crowd
has driven the odds down below their reasonable probability on their
favorites. A few, well chosen long shots
become logical small bets. Commodities will likely be such a bet in the
future. More importantly, the future rise in their prices will signal a rise in
general global demand which should be good for the rest of the portfolio of
stocks, bonds, and real estate. I can not guess the timing, but it is probably
closer than those who are fleeing commodities today believe.
The fourth reason for
my optimism is because informally I have managed portions of my portfolio in
the mode of the Lipper Time Span Portfolios. As in the example above, I have
some money to meet current spending needs for a couple of years. Eventually
this portion will be spent. The next portfolio concept is the Replenishment Portfolio
to create the new Operational Portfolio. This portfolio is structured so that
it can remain reasonably fully invested through the next major downturn seeking
to avoid the risk of being too late.
The next portion of the
my Timespan Portfolio money is the Endowment Portfolio, which should see my younger
wife through her expected long life spending needs. The securities and
managers used are similar to what are in the Endowments Portfolio that I see or
manage. The final portfolio or the Legacy Portfolio is designed to meet the
needs of the family and charities.
Conclusion
The earth is not flat, nor
for that matter round as more popularly portrayed, but spheroid with bulges around
the equator and a bit flat at the poles. The flat earth believers were wrong,
but the common belief today is not quite accurate which gives to some an
information advantage. It is often a point of view based on more thorough information
that leads to good long-term investing.
Question
of the Week: How have you segmented your long-term
investments?
__________
Comment
or email me a question to MikeLipper@Gmail.com .
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Copyright © 2008 - 2015
A.
Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.
All Rights Reserved.
Contact author for limited redistribution permission.
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