Introduction
Future interest rate
moves of the US Federal Reserve are described by its members as “data dependent.”
This is meant to suggest that when a statistic reaches a certain level, a
future action is ordained and carried out. The immediate present (or actually
slightly old) figures determine the future according to these economists and
other politicians of the top-down persuasion. Considering how bad the record is
of the Fed’s predictions, it is a “puzzlement” why these predictions are given
so much credence that some mythical king of Siam might wonder.
What is even a bigger
puzzlement is why so many investment performance reports start explaining their
performance based on the latest data dependent pronouncements. Strange that so
many so-called professional investors dwell on the current price (yield or P/E)
level and not what as an investor I am really interested in. What I care about
is the terminal price of my investments.
The terminal price of
my investments is difficult to guess, but that is exactly what I will use to
meet future spending needs, whether I am acting as an individual or a fiduciary
for a public or private endowment. To determine my terminal price I will need
to project the range of the most likely future price trends for the
investments. Estimating my place on these price curves will be determined by
the range of my likely factors including spending/saving habits including
health-related, some actuarial assumptions and probable reactions to cyclical
markets. Not a single one of these unknowns is easy to determine. Nevertheless,
each one of us unwittingly does this at every buy, sell, or hold decision we
make or we allow to be made for us.
A
Helpful Took Kit from the Racetrack
When
we are besieged by too many questions it is useful to break them down into
logical groups. At many US racetracks there are up to ten individual races a
day. This translates into about 100 horses trying to win. Luckily for the
handicapper, or if you will the analyst, the horses are only trying to win
their specific races. These races are divided by length of the race from short
to long distances, age of horse, racing experience of the horse, prior level of
winnings, and whether the owner is willing to sell the horse at a specified
price. One could take conditions of the race as a determinate as to which of the
myriad factors on each horse that is to be considered for a bet. Out of this you
could come up with a single or a very limited number of probable winners for
the race. That is half the job at best. Moving away from the past you should
look to see whether the horse looks healthy and is being ridden by a jockey
(portfolio manager) that is experienced with this horse and others who run the
same way.
While
there are numerous other factors, the final decision on what to bet and how
much to bet is a function of the odds or the weighted opinion of others
compared to your own views. If you are in total agreement with others even if
you win, the payment odds after the track's take and taxes are deducted won’t be very
large. On the other hand, if your analysis leads you away from the crowd’s
choice as most great portfolio managers do, your payoff will be larger but you
will suffer the indignation of hearing about the brilliance of the popular
choice. Racing and investing are not like picking a winning political
candidate. In politics it is guessing what the majority will do rather than
picking the most qualified.
Applying
Data Dependent Factors to Racetrack Tools to Win
One of the reasons we
developed the Lipper Timespan Portfolio concept is that different data points
have vastly different impacts on portfolio orientation. For example,
demographics are unlikely to have much impact on the investment performance for
the next five years. Bear in mind that in the last five years today’s equity
funds (now numbering 14, 834) rose
+11.79%. Taxable fixed income funds (now
numbering 4831) gained, including income, +3.66% in the same period. However,
when I look to invest money for a minimum of ten years I am struck with the
fact in 2014, Germany & Japan’s
average age was 46 years, Italy & Austria 44, Canada was 41.7, Russia 38.9, Australia
38.3, US 37.6 and China 36.7 years old.
On the other hand
Nigeria and Uganda averaged 15 years and three several other African countries averaged
16 years. India was in the middle with an average age of 27.
To avoid a political
collapse which can lead to military problems, we will need to aid in the
retirement of the senior populations of the so-called developed world which
suggests that taxes on the productive sections will go up. For the teenagers in
Africa we will need first to feed them, then educate them to find useful jobs
with a future.
Currently almost all
general portfolios are invested largely in the Northern Hemisphere and in
developed countries. We don’t have ten years to make the shift if we want to be
ahead of the data dependent crowd betting on low return solutions. At some
point we will need to understand demographics as we answer the cover of this
week’s Barron’s,
“Commodities: Time to Buy?” In building our longer term portfolios, we need to
recognize that increasingly people will be living in or very close to cities,
not in the country. This should refine our investments even further.
For most investments you
can see a lot by just looking. Earlier
this week, in walking relatively few blocks into the local business district I
saw a uniformed workman with a meter rapidly going from home to home. When I
caught up with him, he announced without breaking stride that he was a meter
reader and the day was so pleasant that he wanted to finish his task. Years ago,
as an electronics analyst I followed companies that were developing remote
meter reading that could be done from some base station. I was pleased and
somewhat dismayed that my brief walking companion still had a job. I don’t know
that if he had been replaced by technology he would go to the mall or the
downtown where stores were looking to add sales people.
Last year I told
someone that I could assemble a world class investment organization knowing a
large number of investment professionals that were out of employment or were
unhappy where they were. Enough of these individuals have now found their
conditions have changed that I feel I could not back that statement up today.
From my friends currently running financial groups I hear they are finding it
difficult to find the right type of people to hire. Because of our educational systems' failures
we are likely to have increased structural unemployment such as the meter
readers or the children recently graduated with liberal arts degrees. Nevertheless
our economy is showing signs of strength. The five year and under portfolio is likely
to enjoy both improved results and a measurable downturn which hopefully will
come later.
Question
of the week: Which will come first, DJIA 32,000 or
10,000?
__________
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Copyright © 2008 - 2015
A. Michael
Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.
All Rights Reserved.
Contact author for limited redistribution permission.
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