Mike Lipper’s Monday Morning Musings
Before Focusing on Shorter-Term Reactions
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
We should recognize that several topics that arose this week
will have longer-term implications and impact results for many years, if not
future decades. None of these contributions to our thinking will influence
things directly, but some or all may influence our future.
Smoke from the Canadian wildfires has blanketed much of the
US. Sports activities were delayed in Philadelphia, and the World Cup game in
Miami was also influenced. The important message is that the US is not an
isolated country, activities in both Canada and Mexico have measurable impacts
on us.
The World Cup competition introduced real America to many
sports fans from all over the world. Prior to traveling to the games many
people looked at the US as Manhattan below 60th street, a few government
buildings in D.C., and some sound stages in California. Costco, Brooklyn, and
our national parks have awakened them to the country’s beauty, its friendly
people, and a large population of many talents. It also showed athletes playing
their game better than those representing America. I suspect by the next World
Cup we will produce better results too. The biggest change is likely to be in
women’s soccer.
Our media and our President comment on “the stock market” as
if it were singular. Furthermore, the direction of the market is aligned with
the economy. Increasingly, “the market” is made up of several smaller markets
moving differently from each other. For most of this year, important sections
of the market have been pointing down compared to a limited number of tech
companies going up. The stocks of some of the nation’s leading healthcare
companies are selling at 1990 or 2000 prices. These companies are rarely
mentioned by pundits or politicians. In future it would be wise for investors
to participate in the growth of Asia, and later Africa and the Middle East.
The final US input may be a collection of groups in Congress
having only titular relations with the two main parties. The main battle will
be in the Senate, which takes 60 votes for most legislation to pass. However, neither
party will be able to count on all its members due to some issue specific
deserters. This could lead to the only functioning group being a conflicted
White House ruling through executive orders in all agencies except the
Fed.
Clues To the Future
The Three Jobs
Security Analysts essentially have three jobs. The first job
is to avoid being tagged with losing money, or worse, having a negative relationship
with a paying client. The second, and most common function, is to be associated
with winning positions or clusters of winners. The third job is to successfully
support the sales effort of the organization.
What is our Role?
First and foremost, our first loyalty is to our investment
management clients. If we are reasonably successful, we then earn the privilege
of sharing our views with others through this blog.
We Use this Blog to Shape our Thinking
The price action of common stocks did not give us much help
last week. In general, the daily moves were equally balanced between gains and
losses. However, the latest sample survey of the American Association of
Individual Investors (AAII) had their six-month expectations swinging a bit
positive. (The AAII survey does not cover the end of the week, and many market
analysts treat it as a contrary indicator at “turning points”.)
Our Biases
We think we do a good job over an extended period for
long-term investors. In our longest multi-generational account of sixteen positions,
five holdings represent over 50% of the gains. This demonstrates that most of
the time we prefer both a small list of holdings and the ability to let winners
exceed the SEC’s definition of diversified. Our accounts consist of both common
stocks and mutual funds, or the manager’s portfolio. We also own securities
that invest overseas, which are appropriate positions for this account, but may
not be for others.
Some Hints for Long-Term Buyers
Two very popular stocks, IBM and Space X, which we do not
own, declined this week. Both have lessons we believe are important for
long-term investors. The fall in IBM was caused by the company’s disclosure
that their software, consulting, infrastructure, and main frame computer
customers are switching to buying “chips”. While pundits focused on what they
were not buying from IBM, the item that struck me as even more important was
the decline of items tied to main frame computers. IBM was responsible for
selling some 60% or more of these expensive devices. In future there will be
some consulting and infrastructure sales, plus an ever-decreasing number of
mainframes. Furthermore, they no-longer have the advantage of being the first
computer company with “sales engineers”. IBM is not the company that my
grandfather loved. The lesson for all of us is that even one-time great companies
can have economic difficulties. There is not a single company remaining from the
original Dow Jones Industrial Average (DJIA), with the majority of them no
longer in business.
At the other extreme, Space X is a business with exciting
future products and services which also declined this week, selling below its original
public issue price. In our role as portfolio manager we do not invest in highly
sought after IPOs.
Despite the problems associated with these two leaders, the
number of advancing prices on the NASDAQ exchange were higher than the number
of decliners this week. However, on the older New York Stock Exchange (NYSE) the
reverse was true 46% vs 59%.
Question: What if anything I have said do you agree
with?
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Little Occurred During the Trading Week - Weekly Blog # 949
Mike
Lipper's Blog: What is Pending and When - Weekly Blog # 947
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