Not Yet A Peak And Luck Lessons - Weekly Blog # 572

by: Mike Lipper, CFA
Summary

Comments about investment markets are mainly focused on earnings and related valuations, and these have not recently been helpful as guides to making investment decisions.

In their place, some are relying on various statistical measures of investors' sentiments, and the current somewhat bullish indicators are not generating a lot of enthusiasm.

While no forecasting measure is ever 100% accurate all the time, I believe we have not yet reached a peak level.

Absolute price tops and bottoms rarely occur. Most of the time market prices fluctuate without creating important turning points. Comments about investment markets are mainly focused on earnings and related valuations, and these have not recently been helpful as guides to making investment decisions. In their place, some are relying on various statistical measures of investors' sentiments, and the current somewhat bullish indicators are not generating a lot of enthusiasm. There is something absent from the picture. The stock market has been moving up for three and half months, but the volume on the New York Stock Exchange in 2019 is down -4.68%. An even better measure of short-term speculation, the Nasdaq Composite, is up + 1.31%. Some short-term traders may be concerned that in March the three major stock indices had a gap in their price charts. Many market analysts believe that gaps need to be filled before a price trend can be relied upon. While no forecasting measure is ever 100% accurate all the time, I believe we have not yet reached a peak level.

Sports World Experience

One should pay attention to the importance of luck, especially in light of Tiger Woods winning "The Masters" golf championship this weekend - a remarkable comeback for him considering his physical and personal problems. Not taking anything away from the winner, but a couple of golfers that were ahead of him ran into some poor luck with a few of their strokes. In my basic investment analysis course at the racetrack, I would call this "racing luck". To me, the most useful analytical time at the track is the twenty- to thirty-minute period between races. This is the time during which I compare the results of the prior race against those predicted by my handicapping analysis. Most often, with the benefit of hindsight, one can find in the records of past races the reason the results turned out as they did. In the minority of instances, when the results could not have been predicted, it was the result of the record being incomplete or the result of unanticipated "racing luck".

My Lucky Experiences

I have had two experiences that had nothing to do with my securities analysis training and certainly was not tested in my CFA exams. I would call these examples of "racing luck".

  • As a result of following closed-end funds, I owned a few shares of an Eaton Vance fund which had a relationship with Winrock, the venture capital arm of the Rockefellers. They had a share interest in some of their holdings and for regulatory reasons needed to terminate it, resulting in the closed-end fund distributing ownership of those shares to its shareholders. Consequently, I own a few shares of Apple (AAPL) at under $1 apiece. (At some point in the distant past, I sold half the position because I had enough losses in other securities to offset the large gain in Apple. Very dumb move to let taxes dictate an investment decision - an important lesson.)
  • Many years ago, I took out a life insurance policy and later realized that unless I passed prematurely, it was a bad use of money. The rate of return the insurance company needed to meet its obligation was low relative to what it was earning on its investments. Thus, I bought some shares in the insurance company to take advantage of the spread and the float in the investment account. As a result, I would have a sales force working for me to find others that did not fully understand the economics of insurance. This is a lesson not taught at Columbia. Over the years, the insurance company did well but was never a high-flying stock. Recently, it was bought out for cash and stock, the cash being many multiplies of my cost. Thus, I am more than satisfied. The stock is CVS Health (CVS), which I currently hold. I don't generally directly invest in the health care industry, but let my choice of specialty and diversified mutual funds give me exposure. Barron's recently had a cover story titled "CVS This could be the future of healthcare. Time to Buy". According to the article, it is selling at an 8 P/E and a yield of 3.79%, which is in the range of the insurance stock I bought years ago.

Lessons

  1. As indicated, don't let taxes alone drive investment decisions. Sell when there is a better use for the money.
  2. One needs to be invested to allow good luck to happen to one's money. If I had to buy them independently, I probably would not have owned these winners.
  3. Over long periods of time, investing in a portfolio of equities works better than trying to time the market
  4. Cash reserves are appropriate to meet expected payments and for use as a possible opportunity reserve.

Questions of the Week:

  1. What is the range of your opportunity reserve?
  2. How long should you keep the reserve if you can't find a commitment?

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.