Notice the number of words one is besieged with by the media concerning the current economy and market. Investment marketers take their cues from the media to pitch their wares, aggrandizing their pitches to focus favorably on easy markets.
These marketers convince the “corner office” that expensive marketing efforts, focused on the relatively short periods used by pundits, reward portfolio managers and other investment staff. Would you believe that the investment efforts would be directed toward managing portfolios to achieve good results in the time periods favored by the pundits?
One indication of the market power of pundit soundbites is the weekly sample survey conducted by the American Association of Individual Investors (AAII). They ask their weekly sample if they have a bullish, bearish, or neutral market performance outlook over the next six months and most of the time their views represent those of the loudest pundits.
Professional market analysts consider the trend of their predictions a contrary indicator, like odd-lot transactions at turning points used in the past. Statistically, they are extrapolations of current trends, or what politicians call “the big Mo”, or momentum.
Only half the number are bearish vs. bullish in this week’s reading, which probably tracks the word count published by pundits. This extreme ratio, or higher, is often found at significant turning points.
Focusing on this week’s information I examined the amount of attention pundits paid to these factors, as well as the lessons learned. (Lessons learned are in parentheses.) The purpose of this exercise is to suggest our subscribers do a somewhat similar exercise using personal inputs and lessons, perhaps sharing them with this group.
On Friday, Moody’s reached a record high price of 19 times its original cost in our private financial services fund. (To offset the fixed income cycle Moody’s is successfully developing other products and services, both organically and through careful global acquisitions. These are being recognized by the market.)
More than half of net flows into mutual funds and ETFs are going into money market funds. In May, $19 Billion went into these funds paying low interest rates, while Tech sector funds experienced net outflows of $5.8 billion.
Investors are choosing to invest in cash, accepting the twin risks of inflation and a two-month decline of -2.4% in the value of the US dollar in April and May. The decline in ten-year US Treasuries yields is primarily due to foreign buyers seeking to take advantage of relatively high US yields, even after currency hedges.
Longer term views of top fund managers
Two of the largest mutual fund management companies serving both individual and institutional investors, Capital Group (American Funds) and T. Rowe Price, recently sent reports to investors and distributors urging them to hold through the coming market decline.
The historic bases of these groups are slightly different, American Funds being historically focused on their growth & income load funds and T. Rowe Price their no-load growth funds. Both have sound records and now offer domestic and international vehicles to a global marketplace.
Summarizing their well written views:
Capital Group emphasizes the cyclicality of the market and the danger of jumping out during a decline. They demonstrate the negative impact on long-term performance resulting from being out of the market on the ten worst days during major declines.
Most periods of decline are short relative to those of rising markets. The one exception, using my words, “the second FDR depression”, immediately followed the prior depression, March 6, 1937, to April 28, 1942. This is important to me, as the Biden or third Obama term looks to FDR as a model. They could be right.
T. Rowe Price lists the following concerns: nearing peak economic levels, rising inflation, higher taxes, central bank mistakes, and increasing geopolitical concerns. Perhaps the one distinguishing difference between the two firms is T. Rowe Price having public shareholders, including us. Consequently, they may be more sensitive to investor sentiment trends.
One risk that should be added to the worry list is the current younger generation of leveraged traders losing a lot of money, which seems inevitable. It will give politicians an opportunity to impose more draconian regulations, which will likely raise the costs of investing and reduce opportunities, for a while.
Our own holdings
As a student of successful wealthy families in numerous countries, I have been impressed by the concentration of wealth in a relatively small number of long-term investments. To an important degree, these traits have been my personal model as well. The success of this strategy comes from the appreciating long-term holdings becoming a larger portion of the total portfolio, more than offsetting the inevitable losers. The following is a brief discussion of four significant winners and why I acquired them.
- S&P Global, formerly McGraw Hill, was purchased in 1977 because I did not wish to be embarrassed. (At the time I was the chairman of the program committee of the New York Society of Securities Analyst. I was blessed with having a strong committee, one of whom was the leading analysts covering McGraw Hill, which appeared to be too complex. Our solution was for the first time to devote one full day to one company, going through each of their major parts. I didn’t know the company and was concerned that I would embarrass the NYSSA and myself by asking a dumb question, so I bought a few shares of the stock. Luckily for all concerned the meeting was a success and lucky for me I continue to hold those shares, which have produced a return of 35,810%. The lessons from this are, do the right thing for your perceived responsibilities to others and it is good to be lucky.)
- Another example of being fortunate happened when I purchased a few shares in an innovative closed-end fund. It was one of the very first funds, managed by Eaton Vance, to own private equities along with publicly traded stocks. The private equities were selected by the venture capital group of the Rockefeller family. For regulatory purposes it was later determined that these investments were inappropriate for a closed end fund due to the difficulty in ascertaining current values. Consequently, the partnership with the venture group was dissolved and the fund holders were paid in kind. That was how I had happened to get a few very cheap shares in Apple. By late 1999 I realized the potential of Apple and consciously bought more shares. The combined Apple holdings have gained 21,735 % over cost. (The lesson being, when things happen study the opportunity.)
- Not all my long-term holdings started with luck, some actually showed analytical skill or the recognition of missing skills. In 1985 my investments were quite limited, as all my time was spent developing Lipper Analytical Services into what became a premier institutional global analytical firm producing analyses on the fund business. Nevertheless, I was conscious of a need to build an investment portfolio. That was when I bought a few shares in Berkshire Hathaway. (The critical lessons that drove this purchase were a recognition that casualty insurance, particularly reinsurance, was difficult to understand and buying holding companies was a separate skill set. Based on this self-analyses it was not difficult to select the right investment, Berkshire Hathaway. The gains from that purchase are 28,393%. Charlie Munger and Warren Buffett’s skills have been extraordinary.)
- The final successful long-term investment, bought in 1987, is now the stock of Morgan Stanley. The original purchase was Eaton Vance, the innovative fund management company previously mentioned. I believed that as a peddler to my fund clients I should be able to see the world through their eyes. For an old Boston based investment counsel firm they were involved with originating innovative products and services. For many years this trait produced good results but it has not done so recently. Because my original reason for buying the stock was to see the world as my clients do, I was not surprised that they sold out at a good price to Morgan Stanley. From the original purchase the appreciation has been 2,247%. (The critical lesson is, to leave the battlefield successfully we must recognize when the game has evolved from one in which we have superior skills to a new one that we are less equipped to win.)
Two more history lessons
Ben Franklin left $2,000 in his will to help young tradesmen in the cities of Boston and Philadelphia. For 200 years only the income could be spent.
By 1990 the balance after expenditures for scholarships, women’s health, help for firefighters and disabled children had grown to $6.5 million. In many ways Ben Franklin was the smartest of our Founding Fathers. (Two critical lessons: the power of compound interest and delaying the spending of principal as long as possible.)
In looking at the share of the world’s GDP from 1500 to the present time there are only two countries that approach 40% of the total, China and the US. China peaked around 1820 and the US around 1950. China is growing again, but the US is not. WE SHOULD NOT IGNORE THIS, particularly in terms of education and discipline.
A former president of the New York Society for Security Analysts, he was president of Lipper Analytical Services Inc. the home of the global array of Lipper indexes, averages and performance analyses for mutual funds. His blog can be found here.