For thousands of years, the human body and emotions have not changed. So it should come as no surprise that we repeatedly make the same mistakes. Too bad because most of the time we only learn from our mistakes, and possibly those of others.
One of the great benefits of visiting London and visiting friends / colleagues fifty years or older is the opportunity to reflect on the mistakes of the past.
It is a particularly good time now, as the financial community is forced to play a role in the governance of human behavior by guiding the behavior of companies and the market. My recent visit to London this week brought me to this task.
Humans often want more than they currently value and seek things beyond their current condition, such as defense. Research begins with extended family, community, tribe, state, nation, alliances, supranational organizations, and businesses (especially utilities and financial communities). Why is the list so long?
The answer lies in trusting top-down thinking. A top-down review of tenure disappointments demonstrates that without well-thought-out bottom-up practical thinking, the desired big idea fails to be successfully implemented. A few examples will illustrate the point.
In the UK, wisdom is apparently synonymous with investment success and that is why most CEOs are replaced in their 60s. Independent directors also have limited mandates. An extreme example is the likelihood that no CIO or CEO has experienced a bond “bear market”. It is now very popular for incoming CEOs / Chairs to be women or minorities.
Many are qualified, but one wonders if they are the most qualified. Much of what is done today is being done to achieve a high ESG digital rating. In the future, as in the past, customers and shareholders may suffer from the stubborn thinking of graduates of elite universities, military regiments or clubs.
There are at least three investment trusts (closed-end funds) that are over 100 years old and they can teach us two useful lessons. Each was a narrow sector fund investing in US railroads, oil fields in Texas, mortgages and rubber plantations in Malaysia. Today we have many specialized open and closed funds.
Some perform very well over a period of time, but underperform more diversified portfolios over longer periods.
The second lesson to be learned from these old sector funds is that when you invest in a narrow base fund, it can evolve into something quite different. Managers often recognize the need to invest in another type of business when the original one is no longer attractive.
I am always looking for different ways to analyze investments and other activities. A successful multigenerational family uses an additional metric to gauge success, believing that losing money is much worse than not maximizing the upside.
In their relatively small number of losses, they measure the multiple of the gross gains of the gross losses. I like this approach for endowment and multigenerational types of accounts.
This week, there is a dichotomy between a highly valued US stock market and the slightly negative performance of the generally lackluster major stock indices.
A contrarian or good analyst might look at the US data for the week and notice the often reverse 6-month prediction mirroring the American Association of Individual Investors (AAII) sample forecast. Bullish forecasts jumped to 48% from 42% the week before. Additionally, 6.9% of NASDAQ stocks traded hit new lows, while only 3.2% of NYSE stocks hit new lows.
While walking around non-financial neighborhoods and shopping malls, there were very few ATMs to get cash. When providing feedback to seasoned investors, they said their kids don’t use cash. The sites of local bank branches are increasingly used for restaurants or stores. (Similar trends are seen in the United States.)
When traveling, there is a risk of not reading financial news carefully. One article was titled “Berkshire Revenues Drop Two-Thirds”. It was only by reading the fine print that it was discovered that the comparison was compared to the previous quarter, which had recorded a very significant investment gain. More importantly, third quarter operating profit increased quarter over quarter.
Two observations that could have major long-term implications became known this week:
- Morningstar estimates that a safe 3.3% withdrawal rate from a 50/50 balanced retirement account would preserve capital during retirement. (I have my doubts given the government’s inflationary policies and demographic trends producing fewer productive workers.)
- Apparently, the meeting of the Communist Party of China (CCP) Central Committee did nothing to slow President Xi’s goal of being in power to at least 83 years.
Question of the week: Changes in your way of thinking?
A past president of the New York Society for Security Analysts, he served as president of Lipper Analytical Services Inc., which hosts the global line of Lipper indices, averages and performance analysis for mutual funds. His blog can be found here.
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