Mike Lipper’s Monday Morning Musings
Watch Out for the Four
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Preface
As subscribers have been told, I am shifting my focus to
investing for long-term gains, hopefully for multiple generations. This is the
time to begin searching for future winners, although it’s not the time to begin
serious buying. If you are like me, at times it can be difficult to only follow
an investment intellectually. I need to own a small amount so that I go through
all the relevant info while awaiting the time to begin a meaningful buy
program.
Timing May Not Begin Until:
The beginning of the buy program will not start until people
and the data change. In terms of people, there are four structural leaders.
These are the men who wish to change the future and are governing to do that.
They lead and largely dictate activities in the US, China, Russia, and North
Korea. Only the last one, North Korea, is preparing to eventually pass the
torch of control to a very young daughter. In each case the eventual leader
will be different than the present leader and will have to exert power to stay
in place. Any of these replacements could have input into future global
investments. Because of the similar ages of the first three, investors will be
faced with cross currents that will make choosing investment policy difficult.
Before these leadership transitions occur, the global
economy is likely to change multiple times. I expect we will be dealing with
the terrible “4s”* at least some of the time. The data series likely to experience
major swings are inflation, currencies, and taxes, among others. Changes to these
data series may not be dictated from on high, but in the marketplace. Additionally,
secular changes in demographics and technology will have an impact on how
people act and feel.
*Terrible 4s are 4% for inflation, unemployment, and dollar decline,
leading to an S&P 500 price that starts with a “4”. A high 4 signals a recession
and a low 4 a depression.
What Can We Do Now?
First, we can pay attention to what people are doing, not
saying. Actions speak louder than words. While the media is full of pundits
talking about market indices at new highs, 58% of the stocks on the New York
Stock Exchange (NYSE) fell in the latest week. Perhaps more meaningful, 56% of the
stocks fell on the NASDAQ. A survey of investment advisers and their clients
found advisers twice as bullish as their customers.
Second, be aware of financial and economic history. We know
that historic patterns don’t exactly repeat, but directionally they are pretty
accurate. Economic cycles are based in part on the level of debt being created
throughout the system. (Government deficits need to be considered as well as
business debt, personal debt, and accidental debt.)
When debt repayment becomes too burdensome it won’t be
promptly repaid and will cause purchasing power to drop and fixed income/equity
markets to decline. Depending on the severity of the decline it will be called
a recession or a depression. The frequency of recessions is normally five to
ten years, suggesting one is due. A depression is much more serious and
infrequent, usually every fifty to one hundred years. Depressions are often caused
by mismanagement of an economy in a recession. We have not had a depression for
ninety years and some believe the last one brought on WWII. The key for us is knowing
that these occurrences are possible and being aware and ready to change
behavior.
While Waiting
The present should be devoted to looking for stocks to buy
for the next expansion. A study of the past suggests the leaders of the next
cycle will be quite different than the present. Bearing in mind that many children
born today will need retirement money 100 years from now, the odds of most
large companies surviving is not good.
There are lots of ways to choose stocks to research. None of
them are perfect and they will change over time, so investors should always be
learning what will cause change. From time to time, I’ll pick one approach to
explore briefly, so keep tuned to find an approach that helps you.
Acquisitions
No solution is perfect, and conditions change unpredictably.
It is normal to change our choices after looking at the cards we are given. The
easiest approach is to add a new holding and temporarily retire a present holding.
Additionally, no one plays the investment game without making periodic
acquisitions. Unfortunately, many investors fail to discard some part of what is
not working. This habit of adding without discarding leads to an
ever-increasing number of acquisitions, which in most cases leads to average
and eventually below average results.
I have never seen an acquirer who couldn’t benefit from
getting more talent, often with different characteristics than their existing talent.
I have often found it better to buy a company for management and tax purposes, even
if it’s for a single individual. It has worked for me, even when it was a bad
choice. It is easier for me to make a bad choice than to fire an individual or
a small group who I like as people, but not as workers and co-venturers. I am
comfortable with the way Apple often buys tiny companies, compared to others who
acquire much larger companies with all sorts of personnel problems.
I was speaking with the manager of a small unit in a very
large company who wanted the unit to grow by hiring more people doing the same
thing his present employees do. That may be efficient in terms of output, but it
just adds to existing problems. I would not view this situation as growth but view
it as adding new machines. If on the other hand the new people brought new
talents, they could serve a different group of clients who had different needs,
which is real growth.
There are some companies who try to grow by buying distant
operations, adding resources outside their prime geographical area. I do not
view this as growth of talent either, but as getting more copies of existing
machines. They would be adding to present capacity but not getting new talents
that could open new markets. For me they are not growth engines but merely
machine acquirers, which will not be valuable talents as the business changes. Investors
can see which type of stock I would acquire, even at somewhat of a premium
price.
Question: What do you think about my approach?
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Investors’ Interlude - Weekly Blog # 937
Mike
Lipper's Blog: Not Yet Ready for a long-term Solution - Weekly Blog # 936
Mike
Lipper's Blog: We Have a Management Problem - Weekly Blog # 935
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 – 2023
A. Michael Lipper, CFA
All rights reserved.
Contact author for limited redistribution permission.
Posts
