Mike Lipper's Blog - 5 new articles

Many Trends Within the Same Market - Weekly Blog # 941

Mike Lipper’s Monday Morning Musings

Many Trends Within the Same Market

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

Preface

The purpose of this preface is to share my long-term thinking, which in part drives my current investment thinking. There is no better portfolio manager thinker I have known than Peter Lynch, who produced a stellar performance record with a large equity mutual fund over the 1977-1990 period. One of his beliefs was “Know what you own, and why you own it.”

One approach to investing is to be index aware or agnostic. My approach is different in that it recognizes that all security prices are cyclically dependent due to both the expressed attitude of the individual stocks for security and to the market in general. My focus is on the client, recognizing that they often have several perceived competing needs.

For multi-generational accounts, long-term performance volatility is as important, if not more so, than simple performance, because it can shake people’s confidence. Volatility multiples focused on by pundits in the press can scare investors into dumping well thought out positions.

In many cases, accounts that are managed serially by members of the family have good results, often due to patience and having seen volatility in the past. There are a handful of globally managed accounts that have worked reasonably well, which have both low volatility and good long-term performance.

For future oriented accounts the selection process does not depend on the present roster of products. New products, or more germane new ways of filling critical needs can help companies become leaders in their fields. Apple (*) is one such company, although you should be aware that this approach can lead to failed products or approaches at times.

* Owned in client and personal accounts.

In today’s markets the primary way to avoid equity losses is to invest in fixed income securities, which often have higher yields than current short-term rates due to investing in lower quality or longer maturity bonds. This approach may lead to unexpected losses from higher interest rates, which might be discouraging and defeat the very purpose of temporarily getting out of the stock market, which is to have a buying reserve. I prefer short-term, under two-year maturities, or in a few cases middle yielding bonds with low price/earnings ratios. In the latter case, you should be willing to sell these bonds after a major market decline, even at a loss, to get cash to invest in stocks that are more growth oriented.

There is risk in the growing amount of debt being undertaken by governments, companies, and families, because of depleted accident/emergency reserves. This could lead to a situation we have not seen in 95 years. A significant change in the structure of the global economy that could take an extended period to recover from. Moving further in this direction should cause us to enter a period of reflection, recovery, and renewal. We need to be aware of the possibility that this structural change might happen.

Now a View of the Current Situation

If you look at what is being reported in the current media, you might think “the market” has a bullish future. The truth is, during the latest week on the “Big Board” only 745 stocks, or 26% rose. Even on the on the more speculative and shorter-lived NASDAQ Composite, just 31% of the stocks were sold at higher prices.

For those who have been trained to look at bond yields as a predictor of future stock prices, the average yield of ten high quality bonds picked by Barron’s rose 15 basis points for the week, while a group of medium quality bonds only rose 5 basis points. Rising bond yields mean lower bond prices, which is negative for stock prices.

Two companies I follow are Berkshire Hathaway (*) and McKinsey. Berkshire reduced the number of stocks in its portfolio while simultaneously buying its shares at 144% of book value. McKinsey, a privately owned company, preserved cash by cutting cash dividends and increasing equity distributions to its partners.

* Owned by managed accounts and personal accounts.

I pay particular attention to the performance of mutual funds. On a year-to-date basis through Thursday, 38 of 103 fund sector averages beat the S&P 500 Index Fund average. It has been very difficult to beat the performance of the S&P 500 Index for the past 10 years. Only 3 sector averages have accomplished that, and they were all driven by investor enthusiasm for “AI”.

The same thing happened among the leaders overseas, where a 1/3 of the emerging securities had some activity in “AI”. This was particularly true in Taiwan and South Korea. AI labels, where the company is headquartered, should be viewed with caution, as we don’t know what percent of the chips and computers eventually land in the US.

One final statistic that I follow is the index of industrial prices put out by ECRI. For the week the index finished at 145.33, up from 142.00 the prior week and 32.58 12 months earlier. Obviously, problems in the Strait of Hormuz and other supply chain issues played a role in the increase.

Final impression

All investments appear to have increased risks. So please be careful.

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

Mike Lipper's Blog: What Can Go Wrong - Weekly Blog # 940

Mike Lipper's Blog: This Weekend’s Learning Sources - Weekly Blog # 939

Mike Lipper's Blog: Watch Out for the Four - Weekly Blog # 938

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

A. Michael Lipper, CFA

Contact author for limited redistribution permission.

Comments

Comments

What Can Go Wrong - Weekly Blog # 940

Mike Lipper’s Monday Morning Musings

What Can Go Wrong

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

Preface

In preparing to start a buying program using one of the lessons from betting at the track you should recognize what could go wrong. The purpose of this blog is not to permit betting, but to avoid wagering on one’s ego and failing to learn from the experience.

There are four general reasons for not seeing an opportunity as a trap.

Not appreciating the goals of the source.
Inaccurate data or badly displayed data.
Failing to process past mistakes.
Too difficult to fathom. (Probably the least in terms of occurrence)

Tocqueville, as quoted by Goldman Sachs who deals well with errors. “The greatness of America lies not being more enlightened than any other nation, but rather her ability to repair her faults.” Therefore, I view betting on horses, securities, politics, people, and many other things, as learning experiences.

Sources of Mistakes

We all have deeply felt biases. The media and their chorus of pundits use information to motivate repeat use of their work. Thus, they transmit their pronouncements in the way we would like to read, see, or hear. For example, in the latest announcements of the number of people hired, it was better than many expected compared to the prior, shorter month, with bad weather. Deep in the article was the fact that it was not better than the same month last year. Furthermore, if you deduct healthcare and social assistance workers from the total employed, there has been no growth since 2024. Why is this important? The latter group receives payments from the federal government, either directly or indirectly, which will likely have some impact on the midterm elections.

This is probably a major reason for the various market indices going up. Using the data for this week only, 2/3rds of the stocks advanced and 1/3rd did not. Even on Friday, there was little focus on the number of new unemployment claims, which rose for the week. There was little coverage of the consumer sentiment survey by the University of Michigan, which hit a new low.

When companies release layoff numbers, they are vague and rounded. What disturbs me is that these are some of the most numeric-driven companies: Fidelity, Deloitte, and Commerzbank, all of which announced cutbacks. For some time, established financial and auditing firms around the world have been retiring senior people without hiring replacements. Even some “AI” people have been let go.

One of the most dangerous items of news is a shortage of an industry’s goods followed by a new large supply becoming available. Historically, look at what happened to the price of gold when the size of the Latin American precious metal was announced. While it made Spain wealthy, it hurt the other European nations with lots of gold in their vaults. So be careful if quantities jump up while simultaneously being withdrawn.

What We Should Have Learned?

Perhaps we should have learned from recorded history the need to negotiate debts payments, date, and rate! Examples include the Babylonians, William Shakespeare’s “Merchant of Venus”, the expansion and depression of the 1920s and 1930s, or even the present occupant of the White House.

Almost every sector in the commercial world has added debt as their currency for expansion. This is one reason to keep an eye on the slowdown in ROTCE (Return on Total Capital Employed). Bearing in mind that this sum does not cover accidents and supply chain issues adequately.

Please let me know what you think I can learn.

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

Mike Lipper's Blog: This Weekend’s Learning Sources - Weekly Blog # 939

Mike Lipper's Blog: Watch Out for the Four - Weekly Blog # 938

Mike Lipper's Blog: Investors’ Interlude - Weekly Blog # 937

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

A. Michael Lipper, CFA

Contact author for limited redistribution permission.

Comments

Comments

This Weekend’s Learning Sources - Weekly Blog # 939

Mike Lipper’s Monday Morning Musings

This Weekend’s Learning Sources

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

Identifying sources of learning

One of the main differences between us and most animals is that our brains are larger, which hopefully means we can learn more. The end of this week supplied three sources of learning. The three teams of instructors were: Tim Cook (Steve Jobs), Berkshire Hathaway’s Annual Meeting with shareholders (Warren Buffett/Charlie Munger and Greg Able), and the Bettors and Horses at the Kentucky Derby. From each I can learn a lot. Matter of fact, each could be a whole semester at Business Schools instead of what they are currently teaching.

Tim Cook (Steve Jobs)

At the end of the so-called work week Tim Cook conducted what was his last quarterly meeting for shareholders and analysts of Apple (*). He focused on the company’s critical relationships with customers and what is owed to them. He stressed what Steve Jobs taught, the betterment of the users’ lives. These were the critical thoughts passed onto the oncoming new President of Apple. We should pass these views onto all we deal with, focusing less on what they paid us and more on what we did for them.

* Owned in personal and client accounts.

Warren Buffett/ Charlie Munger & Greg Able

Mr. Buffett spoke to many of the shareholders attending the annual Berkshire Hathaway (*) meeting, both in person and electronically. His advice for people reaching 50 years or older was to switch their primary investment focus from making money to capital preservation. He emphasized saying no, particularly to not well understood new investments. (I do not own any “AI” stocks directly, but there are many in mutual funds I own. The key to their future is what they have yet to produce, not what they are selling today.) He believes investors in retirement should prune their holdings and try to explain what they own to their heirs, feeling it is more beneficial to focus on how the inheritance should be used rather than the intricacies of what is owned.

* Owned in personal and client accounts.

Greg Able is the new President of the company and is focused on improving the operations of the company. When the talented Chief Financial Officer transitions into retirement, he will be replaced with both a CFO and a new lawyer. Furthermore, for the 31 private companies owned by Berkshire, he has appointed a trusted internal executive as leader. Instead of doing just financial oversight, he will be reviewing the operations of the formerly private companies. Good policies of the past will be reviewed to see if they are right for now.

My personal view is that there are two major trends which we did not have to deal with in the past, but which could be much more important in the future. The first is one of the causes of financial and economic cyclicality resulting from not repaying debt on time and at full value. Defaults on debt have led to depressions in the past and have been the cause of unplanned contractions.

In the decade of the 1920s into the early 1930s society encouraged the global extension of debt at the retail level, including its use as a defense against tariffs (Smoot Hawley). Currently, we have an expanded federal debt led by someone who needed to renegotiate his own debt. Our government encourages investing retirement capital in debt. The national debt is larger than the GNP. (Old debt has a due date, while GNP is produced each year.)

The second dangerous trend is the value of the dollar in world trade. As debt grows, overseas investors value it less. Meaning, it not only becomes more expensive for funding our debt, but also for paying for imports of food, clothing, and raw materials. We are better positioned than many other countries who are in worst shape, but not all. Asia, which has a younger population and a disciplined workforce, is in better shape. Higher inflation leads to lower long-term value of the currency. One measure of inflation not issued by our overworked government is the ECRI Index of Industrial Prices, which was up 140.35% this week for the last 52 weeks.

Kentucky Derby

I brought this on myself by stating that I learned the basic tenants of analysis at the New York Racetracks. A subscriber asked who I was betting on in the race. Where do I begin? Perhaps with two axioms. First, as with most things in life, short answers are often wrong. The short answers are wrong because they are stated without limits and conditions. That brings us to the second axiom, I don’t like losing. I don’t like losing because it is a double loss. The first loss is the sum wagered, and the second is the loss of funds necessary for future betting and other things.

There are two negatives against betting at the track. First, the track takes a cut of all bets and there are personal expenses of travel, admissions, and food. Second, as a game of chance it is rigged because of the track’s take. Additionally, winnings are taxable at federal and state levels. There is still another drawback, about 30% to 50% of the time the lowest yielding horse wins. Most of the time those winnings are not large enough to offset losses and expenses incurred. I address this problem by limiting the number of times I bet, usually 3 out of 9 races and rarely at the lowest odds. The advantage of this approach is staying away from betting at the lowest odds, which are the most popular horses.

If these issues did not cause you to find other things to bet on, the elements of the Derby might. First, the race is only for three-year-old horses. While horses are born for the record throughout the year, under racing law all horses are born on January 1st. Some horses start their racing history at 2 years old, but many do not. By the time they are three years old they are adolescent. (From a scientific standpoint it would be useful to know the actual date of birth. There is poor but available information as to the number of official races the horse has run. In terms of the Derby, the range I heard was 1 to 4 races.) For those of my age, I am reluctant to take adolescent horses and most humans seriously.

So, after all this I did not place a bet on this year’s Derby. Most of the time I am not interested in races for three-year olds that are run any earlier than June, which starts with the Belmont Stakes race. These races are also a bit suspect because the course has been altered.

I would not have bet on the winner this year. However, the trainer deserves to be congratulated as she was the first woman trainer to win the Derby. The night before she had a dam which won the Kentucky Oaks with the same jockey who won the Kentucky Derby. Quite an accomplishment.

All of this shows I am still a student and hope you are as well.

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

Mike Lipper's Blog: Watch Out for the Four - Weekly Blog # 938

Mike Lipper's Blog: Investors’ Interlude - Weekly Blog # 937

Mike Lipper's Blog: Not Yet Ready for a long-term Solution - Weekly Blog # 936

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

A. Michael Lipper, CFA

Contact author for limited redistribution permission.

Comments

Comments

Watch Out for the Four - Weekly Blog # 938

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

A. Michael Lipper, CFA

Contact author for limited redistribution permission.

Comments

Comments

Investors’ Interlude - Weekly Blog # 937

Mike Lipper’s Monday Morning Musings

Investors’ Interlude

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

Take Some Gains Before Taxes Do

The common denominator for most big investment gains are changes. Usually changes in investor perceptions and economic structural changes. The Standard & Poor’s 500 (S&P 500) and NASDAQ Composite are at record highs, due largely to enthusiasm for announcements related to the suspension of fighting in the Middle East. (This is not true for the Dow Jones Industrial Average (DJIA) and the average stock. Unfortunately, since WWII the US has had a history of winning wars but losing the peace.)

We do not know the total cost of the war and other spending, including election-oriented payments. I suspect the President’s desire for a lower valued dollar will be achieved. There is also a strong push from urban legislators for “fair taxes”, also known as “tax the rich”. Thus, I believe capital gains rates and estate tax rates will rise.

Due to these expected changes long-term investors should review their portfolios to see how much of their wealth should be realized before their estates are taxed. If this generates significant amounts of cash, I suggest maintaining the cash or short-term treasury holdings for reinvestment.

I believe there will be positive changes in the foreseeable future. These changes may be driven by technology, demographics, immigration, and global factors. These changes are likely to be net larger than politically motivated changes and you want to be in position to take advantage of them.

Investment Impacts of Past Changes

The Founding Fathers were afraid of the powers of government, so they placed our Capitol in the humid swamp of Washington DC, thinking our legislators would desert the “swamp” during the humid months. That worked reasonably well until the development of air conditioning. The end of the government’s year is now September 30th, after the summer political conventions, which reduces the time for debating many of the critical issues of the day. DC is now a year-round city for government workers and legislators. Many work or live in large buildings constructed and possibly owned by real estate families who are probably wealthier than the US Senate members. Thus, the advent of air conditioning changed how our government works.

Another unexpected change was the railroad growth of the late nineteenth century. The highly regulated railroads only made profits on freight travel and lost so much money on human passengers that the federal government became the principal owner of passenger travel. The freight lines are governed by both the Department of the Interior and Anti-Trust laws. This has led to other countries having better and cheaper train service than we do, paid for by charges on the goods we consume. It is interesting to note that the Dow Jones Transportation Index, which covers the rails, was the best performing market index this past week. The rails are still important.

Future Changes

We live in an environment of an increasing rate of change. I leave to others to identify the changes which most investors would not be surprised by.

Geographic Changes

Western Hemisphere countries have become more partners than adversaries in terms of trade, health practice, external and internal defense, probably led by Canada.
Russia, after Putin, will experience major political and economic changes.
Asian countries that border both Russia and China will come into their own in terms of trade and be more open to development.
African countries will welcome joint development from Western countries.
Indonesia and India will become less autocratic, with foreign companies able to generate substantial sales and earnings.
Each country will make their own rules.

Retirement Issues

Over time, US Social Security will be allowed to exclude US government paper and possibly approach being a foreign wealth fund.
It is reasonable to expect that those born recently will live to at least one hundred, so we will need to provide for longer periods of investment and spending.
For the same reason, private retirement vehicles will need to change.

Market Regulation

Using the last trade may no longer be appropriate if it is too small and unrepresentative of the size of the seller.
As more stocks and possibly bonds trade in size in after-hours, having a closing price on the exchange market may be unrealistic.
From a technology perspective, there should be a body that can approve of their use for retirement accounts.
Should issuers of a certain size be required to have assets or insurance on the life of the CEO that can be used in retirement accounts.

As usual, I would love our subscribers to share their views with me.

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

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

Mike Lipper's Blog: Is History Rhyming Again? - Weekly Blog # 934

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

A. Michael Lipper, CFA

Contact author for limited redistribution permission.