Iconic Investing Insights for Turbulent Times
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SHOW NOTES: A. MICHAEL LIPPER
A. Michael Lipper on lessons from the racetrack
One of the things you learn very quickly is you can’t figure out a race if there’s too much or too little talent in the race, or you don’t have enough data. The second thing that you learn is the bidding public makes one or two entrants a favorite by putting more money in. The interesting thing is, historically, favorites win about a third of the time. So you don’t normally want to go with a crowd. The second thing you learn, and this applies very much to life in general as well as investing, is racing luck. Things happen all the time that you don’t know in advance. The key is to not bet all of your assets on one thing, because racing luck can happen. The third thing is that the objective of a day at the track is to walk away with more money than you walked in with. So if you bet carefully, which means only picking ones that make sense to you, all you need most of the time is one winner out of three races, because they tend to be longer odds. The final thing is, after each race, you should look at the past performance of the winner and say, “Why didn’t I pick that one?” You learn more from your losses than you do from your gains.
A. Michael Lipper on the origins of Lipper Analytical
Those lessons that you learned at the racetrack, you took forward in your life. So can you describe how you were able to learn from some of that and create the wealth that you’ve done?
I tried to replicate the racing form. It didn’t really exist for mutual funds. Yes, there was performance data, but it didn’t compare against others or over time. I read – and this was death-defying – the Investment Company Act of 1940. It’ll put you to sleep, but it became clear that the independent directors of funds had to renew the investment contracts each year. Historically, they counted on the advisor to provide the data. I saw an opportunity. I went to the major attorneys for the fund and said, “you’re taking a huge risk. You’re taking judgments from the judged. Much better to have an outsider do it.” Yeah, we could make mistakes, but they’ll be honest mistakes, and you’ll get it cleaner. And over time, we’ll do it better than anybody else, because we will do more of it.
We looked at not only performance, but also fees, turnover, a whole number of things that weren’t generally looked at.
In the investment world, people can accept that you’re only going to be right some of the time, but they really shouldn’t accept it when something happens on a repeated basis that they didn’t know about.
A. Michael Lipper on how to read numbers
A. Michael Lipper on companies that failed by refusing to pivot
Let’s start with the Big Three automakers. They had control of the U.S. auto market, and yet over time, they lost share to the imports and more importantly, the high priced imports. Another example is something called the Nifty 50, where they took the top 50 leading stocks in the market, and that was meant to be somebody’s portfolio. Well, over time, a number of those Nifty 50s actually went bankrupt.
People in the scientific world look at laws as though they’re always right. In the business world, that’s never the case. They’re right some of the time, some more than others.
A. Michael Lipper on the danger of groupthink
Crowds are comforting for most people. They scare me, and it goes back to the track. They may be right. If they’re right, the returns won’t be great. If they’re wrong, and you happen, by luck or by skill, to find the thing that does work, the returns are much greater.
This is also important when you’re trying to decide when to sell. You have to recognize that periodically crowds can make prices, but you have to identify when to get out. And it’s usually when everybody says it’s great.
A. Michael Lipper on navigating recessions
There have been at least three bear markets that didn’t generate a recession. One important question is “is the recession going to be short or long?” Short ones tend to be essentially a price move. You just drop the price on things, and that’s the cure. That happens every now and then, but not frequently. Then you have the longer recessions. I believe that economic cycles are due to imbalances where things are not well managed or not efficient. You can correct some of those in a recession. Unfortunately, if you don’t correct enough of them, you get a depression. The thing that’s facing us now is perhaps the most difficult, which is stagflation: a period of high inflation and slow growth. So your sales don’t grow, but your expenses do. Are we going to go into that? I don’t know. But I think it’s possible. And I think in terms of a portfolio, you should have some of your investments chosen with that possibility in mind. Not all of them, because it may not happen.
[For those investments,] I tend to look at the depth of belief. For example, a lot of companies are going to show declining earnings. There are two sources of declining earnings. One is that the business itself is declining. The second is that the business has lower earnings because it is continuing to invest in a new product or new strategy that isn’t right for today’s market, but might be right later. It’s that sort of investment that has appealed to me. Then I have to make some guess as to whether they’re making the right bet and when that bet will pay off.
A. Michael Lipper on how the average investor can hedge their portfolio in 2022
Two different approaches. The first approach is to commit that you’ll spend 5 hours a week on your investing. If you’re not going to spend that much time, the odds of getting any insights are low. The second piece approach is that most of the people who listen to this podcast probably work for medium to large-sized companies. Your biggest single investment is your job, and that’s where you want to be diversifying. If you are not a complete believer, I would suggest that whatever you do, you average. Don’t put all your money either into the market or into a given stock at one time, but take that amount of money and say, I’ll put 10% in, and for the next ten quarters I’ll put another 10%. Big money is made by long term holding. The reason that works is you don’t get shaken out by periodic market declines. But for a young investor, they can be more patient. They have more time.
A. Michael Lipper on long-term investment strategy
My attitude is that cyclical behavior is normally a five year period. You want to invest beyond the five years. I think now in particular you want to invest some of your money overseas. Your biggest risk today is the U.S. Dollar. It’s beating all other currencies. Again, going back to the racetrack. It’s the favorite. You want to bet on some other things. Not to the exclusion of the dollar, but you want to have investments overseas now roughly a third or 40% or maybe 50% of the profits. And let me define profits. Cash flow, free cash flow is earned overseas by the major companies. So you’re doing that now without knowing it. But you’re not getting the benefit or the risk of what foreign investors do in their local companies.
Years ago, when I was an analyst, I worked for a firm that was very much involved in a European company, and they were pushing that. And I upset a lot of people, which is normal, in a meeting. I said, “why is it that for this great company that we’re recommending every day, the local market is a net seller?” Well, I was right. What the local market saw was that the company was taking too much risk.
A. Michael Lipper on choosing funds over stocks
For example, it’s very rare I will have any direct investment in pharmaceuticals because that’s a game that’s won and lost by the new products. I don’t understand the nuts and bolts of how those products are developed. So instead of betting on one company, I will find good funds that invest in pharmaceuticals, who have doctors and consultants, et cetera, who understand the things I don’t. Stay with what you know. I can assure you I would not be a good investor in fashion stocks.
A. Michael Lipper on researching investments
You need to work on yourself. I would suggest that, yes, you should read the financial press, but also you should read the trade press in areas of your interest and knowledge.
A. Michael Lipper on investing in leaders
Right now, we talk about the supply shortage, and I think that’s miscast. I think the real shortage is capable executives. Leadership is poor. The people who are executives now have managerial skills and very definitely political skills, but they’re not great teachers. This is why I think you’re going to have problems with the unions. We used to be in a business where in annual reports, company after company, within the first page, they said, “our biggest assets are our people.” We’re not saying that now. The front-line people don’t feel that the leadership is going to look after them. It’s going to create changes. Those are the things to be looking at.
A leader may be brilliant, but unable to translate it to the foreman, and that’s a problem. We cut out a lot of supervisors because the accountant says they don’t produce earnings. That’s true, but what they produce is culture, and that’s what builds the long-term value.
A. Michael Lipper on Washington and Lincoln’s strengths as leaders
A. Michael Lipper on the future of cryptocurrency
A. Michael Lipper’s parting words
Investment is an art form. It’s a year-round endeavor where you have to be looking, admit your mistakes and learn and move on.
Remember, I reserve the right to be wrong.