New World Rediscovered - Weekly Blog # 872

 

Mike Lipper’s Monday Morning Musings

 

New World Rediscovered

 

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

 

 

 

Western Europeans Learn the World is not Flat

Mid-Eastern astronomers have known the world is not flat for thousands of years. Copernicus also knew the truth, which most Europeans learned from Columbus when he discovered the Caribbean islands in his search for trade routes to India. The real value of the discovery led to obtaining Latin American gold and silver for the Queen of Spain and her empire, which resulted in greater gains than those possible from exporting Indian tea.

 

Quite possibly, a similar realization could occur from Donald Trump’s attempt to solve US economic problems through changes in trade patterns and tariffs, which could also lead to unexpected riches.

 

Many of our blogs attempt to help long-term investors and their beneficiaries. However, a very high percentage of what the investment community labels as investment research focuses on the short-term. For example, in the latest week 17% percent of NYSE stocks traded on declining prices vs. 34% on the NASDAQ. In the latest AAII sample survey 25% were bullish vs. 41% bearish. This research may be useful for trading, but it would be meaningless in helping generate capital to pay for college costs 20 years in the future, or to help provide funding for new college dormitories or laboratories.

 

Demographic estimates ten to fifty years out are more likely to be useful than current stock prices. One statistic I might find useful is the percentage of recent graduates who make contributions to their college or the college of their spouse. Tracking the growth of people in positions of responsibility at work or in the community might also be of interest. The percentage of students taking two or three years of foreign languages vs. students taking “STEM” classes is another statistic I’d like to see.

Asking appropriate questions for the resolution you are seeking is critical to charting a course toward the desired result. Failure to do so could result in unanticipated outcomes which are not necessarily favorable to achieving the desired outcome. It is equally important that questions address the appropriate timeline for the investment. Not doing so could lead to a similarly disastrous outcome. There could of course be an unanticipated favorable outcome like Columbus’ gold and silver windfall, but those situations are rare occurrences, unlikely to be repeated very often.   

 

Closing questions for the week:

Healthcare costs are rising, can they be capped?

Can better education lead to better and cheaper healthcare?

  

 

 

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

Mike Lipper's Blog: Navigating a New Investment Landscape Amid Political and Structural Challenges - Weekly Blog # 871

Mike Lipper's Blog: Unclear Data Mostly Bearish, but Bullish Later - Weekly Blog # 870

Mike Lipper's Blog: A Different Year End Blog: Looking Forward - Weekly Blog # 869

 

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A. Michael Lipper, CFA

 

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We Allow Our Investment Professionals to be Lazy - Weekly Blog # 776

 

Mike Lipper’s Monday Morning Musings

We Allow Our Investment Professionals to be Lazy

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

  

 

 

The Indictment

Short-term investors are often confused with speculators. While they may produce the most trades, long-term investors own the most securities. This is why the financial media is jammed with views of short-term consequences, e.g., the next announced move and statement of the Fed.

 

Whatever the Fed does, the impact on long-term assets will be minimal at best. The key numbers for long-term investors in declining order of importance are:

1. The purchasing power in local currency at the planned terminal date.
2. An discounted valuation caused by a premature sale.
3. Third is the aggregate value of distributed income while the asset is held. This could conceivably be larger than the first case on very long-held assets in a generational transfer.

Most pundits would rather pontificate about near-term prices than speculate on the three long-term numbers which are difficult to guess and won’t be known until many years in the future. These very long-term guesses are however what owners need in selecting the current assets that should be owned. While it is almost impossible to determine the exact future valuation, it is possible to come up with relative value ranges. In many long-term portfolios there are bonds and other securities with contract relationships. What is far from certain is the price and value of these instruments.

 

Historically, possibly bigger but more uncertain returns are earned from risker equity investments than from more predictable bond-like instruments. Bonds are also characteristically less volatile, but can only possibly recover their face value plus interest.

 

Nevertheless, the lure of higher potential returns attracts investors to equities and with it higher compensation for the advisors involved. This is the ballpark I choose to play in. To do so I take the inherent risk of attempting to make reasonably accurate projections regarding the relative performance of various equities and equity funds.

 

The Playing Field

As most of our clients are US dollar-based investors my primary interest is in US activities and how non-US actions impact US beneficiaries. The following is a list of primary concerns I have about the future of the US from an investment perspective. These current conditions are rarely discussed by the popular pundits.

1. Productivity is declining, which means the US is producing less sales and profits for each dollar of investment or hours of work. Productivity translates into long-term price gains in the marketplace. In last week’s blog I noted that the S&P 500 Index had gained an annualized return of over 10% since 1871. Prior to Covid the S&P 500 rose 9% per annum. We are growing even less this year. Depending on which prediction you choose, the expected gain is between slightly above zero and 7%. My guess is that “social spending” by industry and government has cost us at least one percent. The FTC, reshoring, and energy policies are likely costing at least another 1%.
2. We have lost the drive to win a war and the related peace after our conflict in Korea, Vietnam, Iraq, and Afghanistan. Our military now has a social mission, not primarily a military mission. To win we must want to win. Our current military is underfunded and not structured to win.
3. Excluding immigrants, we like China, are not growing our native-born population. This is not going to help improve productivity. Before 2050 India will have the largest population and by the turn of the century, Nigeria and possibly another African country will likely be the leader.
4. We are likely to see a new generation of global political leaders, possibly with more authoritarian tendencies. US industrial and commercial leaders will also change.
5. US schools are producing a generation of students who do not want to work hard and effectively. Our leading STEM oriented universities will produce good managers for a while, although some of the best will leave. That is too bad. Note the number of top leaders who are foreign born or first-generation Americans. We shouldn’t lose these leaders, we need them to replace some of the current politically adept CEOs.
6. China is likely to remain the fulcrum of world growth, they work harder and smarter.
7. From an investment standpoint, private companies are growing faster than public companies due to leverage and incentives. Incentives eventually lead to these companies becoming publicly owned, which requires public markets to not be overly burdened by government policies.

 

Restructuring How We Do Things

(The following is just one example of what may occur)

Our medical/insurance complexes have become gigantic bureaucratic political bodies, where patients are cogs in a machine. For instance, a patient living in the UK who has been in remission for over 2 ½ years is likely expected to return to the East coast to see his doctor every six months. Why can’t he go to a UK medical location and electronically tie in with a US facility. If these types of arrangements can’t be worked out, the real estate implications are enormous.

 

These are the types of changes we are looking to invest in.

 

Brief Initial Thoughts on Silicon Valley Bank and Credit Suisse

Both were victims of their own business mismanagement, poorly informed clients, and poor government/industry regulation. I wonder in the long run if our society is better off letting them fail rather than partially bailing people out. I don’t know if the victims learn anything. More importantly, do investors in general learn to be more careful. I am most concerned by the last group.     

 

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Mike Lipper's Blog: Can’t Find Totally Risk-less Conditions - Weekly Blog #775

 

Mike Lipper's Blog: Data Performance/Easy.Interpretation/Not - Weekly Blog # 774

 

Mike Lipper's Blog: “This was the Worst Week of the Year” - Weekly Blog # 773

 

 

 

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Copyright © 2008 – 2023

Michael Lipper, CFA

 

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Building Long-Term Investment Portfolios - Weekly Blog # 720

 

Mike Lipper’s Monday Morning Musings

Building Long-Term Investment Portfolios

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

After the Valley

We don’t know what future investment markets hold for us. Nevertheless, we have an obligation to those who rely on us to guide their assets, both currently and when we are no longer around. The nice part of the latter responsibility is, we won’t suffer the consequences.

Based on both recorded and geological histories, we expect the future will contain both up and down periods. We often don’t know which type of period we are in or going into. Unlike most others, I am professionally imbued with a need to plan, no matter how wrong the projections may be.

I start with the premise that we are on a winding slope of a market decline. The following are brief abstracts from four highly respected investment leaders, which in total point to a downward slope:

Goldman Sachs - Expect lower returns for market indices

T. Rowe Price - Global growth is primarily dependent on China

GMO Capital - Stocks are expensive and resources are cheap

Merrill Lynch - Late stages of a maturing bull market

Thus, I have started to prepare a portfolio of both stocks and funds that would benefit from a subsequent rise in the global stock market.

Cyclical or Structural Decline?

A cyclical decline essentially corrects for overly enthusiastic valuation measures in earnings multiples and/or the attractiveness of current yields. Most market declines are of a cyclical variety and are quickly corrected. 

The problem with assigning a cyclical label to the expected decline is history vs outlook. Due to excessive government stimulus spending, many corporations have reported unsustainably high earnings growth, with earnings growth much larger than revenue growth. First half 2022 earnings growth rates are going to look puny compared to the first half of 2021. Many companies will show modest growth compared to 2019. 

One should recognize that for ten years or more price/earnings ratios have expanded and have been a meaningful contributor to prices increasing dramatically more than economic growth. Thus, there is a reasonable probability that the coming recession will be a cyclical one. However, there is a historic example of the federal government taking a cyclical recession and turning it into a structural depression, by implementing radical policies to reorient society. The President that did that based on his “brain trust” was FDR, who is a model for the current resident in The White House.

Is there a societal need to reorder our economy and society? I suggest there is a need to reverse the damage done by the school system, which has produced students who cannot find jobs due to both their behavior and lack of educational discipline. Increasingly, the growth in STEM jobs is overseas, a precursor of future relative economic growth. A structural decline is somewhat unlikely, but one should consider it in developing investment portfolios.

Four Portfolio Approaches

Large-Caps

Most individual and institutional investors prefer to invest alongside others. That is why 30.3% of mutual fund investors are invested in Large-Cap funds, with an additional 19.8% invested in S&P 500 Index funds. While the stocks in these portfolios get most media and pundit coverage, there is “decay risk” lurking. Over the last 100 years, not one company on the largest companies list has survived in the Dow Industrials Index. As the old saying goes, success breeds failure. Companies reach their peak relatively quickly and become more interested in maintaining position rather than growing, particularly in new products and services. 

Small-Caps

In many, if not most time periods, small-cap aggregate earnings grow faster than the largest-caps. However, there are four drawbacks to investing in small-caps.

1. They have a higher rate of business failure, with the larger ones being rescued.
2. Some of the better small-caps are bought by larger companies, cutting off their price growth.
3. Lack of media and analyst coverage leads to greater volatility.
4. They have an absence of critical talent at stress times.

“Barbell”

A favorite technique of the investment community is to take two extreme positions and “barbell” a portfolio, e.g., large-caps/index funds with small-caps. The absence of selected mid-caps and internationals, or enough heavily weighted winners, can produce poor relative returns.

Idiosyncratic Selection

Idiosyncratic selection from the entire global marketplace. Many investors who practice this artform kid themselves, as there is great similarity in their selections. The following is a list of characteristics that can be limiting to successful investments at times:

• Best Product/Service
• Top Market Share or Fastest Growing
• Great CEO (Replaceability risk)
• Lack of Debt or Too much Cash
• Institutionally Owned (Liquidity risk)
• High earnings growth (Unsustainable)
• Smart Ownership
• Large customer base (High renewal potential unless market changes)
• Well-connected within industry and government (Things change)
• Estate and other ownership issues
• Speaks ESG language (Plus or minus?)
• Never moved headquarters
• Strong social connections 
• Ownership too concentrated by age and type of investor
• Etc, etc, etc.

Career Investing

Current and future persons making investment decisions should view themselves as career investors. Part of career investing is accepting periodic mistakes and learning from them, but also carefully exploring fields for potential investment, particularly beyond current borders.

What are your thoughts 

  

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

https://mikelipper.blogspot.com/2022/02/changing-focus-in-changing-world-weekly.html

https://mikelipper.blogspot.com/2022/01/things-are-seldom-what-they-seem-weekly.html

https://mikelipper.blogspot.com/2022/01/two-critical-questions-weekly-blog-717.html

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Copyright © 2008 - 2020

A. Michael Lipper, CFA

All rights reserved.

Contact author for limited redistribution permission.

Investing in Wishes or Thoughts, Fair or Full - Weekly Blog # 613

Mike Lipper’s Monday Morning Musings

Investing in Wishes or Thoughts, Fair or Full

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

Everything people do involves investing. Committing effort, emotions, or capital influences our immediate, short-term, or indefinite future. Thankfully, a relatively small portion of the world’s population invests in securities and funds, which is the focus of these blogs. I have been asked where I get the ideas for these weekly blogs and the simple answer is that they are derived from my thinking about the investment implications of much what I observe, through reading and other inputs. Today’s blog is drawn from my investment thoughts on what I observed this week.

Davos Implications from the Media
The global meeting of the “bright people” drew government leaders, politicians, business leaders, and experts (some self-appointed). We are all in sales and attempt to convince others and should recognize those who are similarly trying to convince others. My first impression was that almost all attending were selling their views rather than looking to buy the ideas of others. As someone who has attended many conferences that were turned out to be sales meetings, I have found them to be useful in making the initial sales effort and reinforcing my knowledge of previously sold items. Thus, my impression of Davos was that it was an expensive way to see old friends and make some new contacts who might possibly introduce the participant to an absent or eventual buyer.

In a few media interviews there was the expressed desire to moderate the boom and bust cycles, usually through some “top-down” strategy. This is a classic wish from those hurt by past recessions, who lust for the power to prevent future recessions. They want to live in a planned world, but they forget the old expression “man plans, and God laughs”.

There are two primary sources of economic/business cycles, fear and greed, and surprises. Today, practically every businessperson and politician are anxious to lengthen the present cycle through to their next critical report or election. The main way they attempt to do this is by weakening the safeguards put in place during the last cycle. They may be temporarily successful in keeping the game going through the next milestone, but increase the risk of failing to reach future milestones. Even if we are successful in moderating the greed in people, we will still be subject to periodic surprises like unexpected weather conditions, medical emergencies (coronavirus, etc.), and machine failures.

To me, the real message from meetings of “bright people” is that we live in an uncertain world. From an investment standpoint it means we need a series of human and financial capital reserves, recognizing that by definition we won’t be able to anticipate all surprises. The best we can hope for is to be a bit early in in recognizing changes. For example, politicians and other marketers are pitching for perfection, but are only going to get well thought out ideas delivered by imperfect humans.

This Week’s Divergent Views
Normally, followers of fund investments expect the average weekly performance to be less than half of 1%. This week through Thursday it was -0.37%, although there were nine mutual fund investment averages that lost over 1%. They were led by a drop of -3.94 % for the 130 Energy MLP funds and a -3.63% drop for the 98 China Region funds. Two investment objectives gained more than 1.0%, the 58 Utility funds gained +2.00% and the 267 Real Estate funds gained +1.06%.

The American Association of Individual Investors (AAII) sample survey showed that 45.6% were bullish compared with 33.1% three weeks ago. (Readings above 40% are abnormal.) In reviewing the weekly prices of stock indices, commodities, and currencies, 31% rose and 69% declined.

Quite possibly, the Dow Jones Industrial Average (DJIA) and the S&P 500 Index charts are signaling a rounding top. A rounding top for the NASDAQ Composite chart has not yet developed. This is significant because the NASDAQ has led the older indices higher. The question for long-term investors is whether current prices and valuations represent fair or fully priced merchandise. Fair prices suggest that buyers and sellers are evenly matched, with equilibrium prices having as much risk as reward for the period. Fully priced suggests that without any new positive information, there is more risk at current prices than there is upside. Relatively low volume and somewhat quiet derivative trading suggests that the direction in the near-term is not yet clear.

Attitudes are a Jobs Problem
In the US there are more job openings than people registered to work. When I question why employers can’t fill their vacancies, one of the constant replies is attitude, particularly the attitudes of young people who attended college. The employers are particularly concerned with  the attitudes of those who’s schooling was not centered on STEM. Those who are primarily schooled at liberal arts institutions (notice I did not say educated), believe that they do not have to provide a sufficient amount of work and cooperation with their bosses and fellow workers. They believe that they are entitled to jobs because of their time spent in school but are not committed to working hard and diligently. I suspect that in some cases the job seekers expect the need for more discipline than there was at school or home.

Saturday night, a thought occurred to me while listening to the New Jersey Symphony Orchestra’s Lunar New Year concert and celebration. At the end of the concert the stage was crammed with a large group of Chinese-American children between the ages of five and sixteen singing in Chinese, Italian, and English. They not only sounded good, but were an example of strict physical discipline. They reminded me of the precision drill teams I experienced in Military School and in the US Marine Corps. As a potential employer I would be very interested in discussing future employment with these choristers compared to some of the young people discussed above. A disciplined work force like those found in parts of Asia is another reason to continue to invest in Asia securities and funds.

Question of the week: Which of my ideas are helping you with your investments?



Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2020/01/is-it-always-brains-over-flexible.html

https://mikelipper.blogspot.com/2020/01/architectural-sway-points-and-current.html

https://mikelipper.blogspot.com/2020/01/how-much-will-markets-decline-10-25-or.html



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Copyright © 2008 - 2019
A. Michael Lipper, CFA

All rights reserved
Contact author for limited redistribution permission.

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