Keep Looking for Growth by A. Michael Lipper, CFA
I am not always a contrarian, but an opposite view from the crowd often gives an investor a safer perspective. Thus the lackluster performance of the US stock market in the first half of January is a prod to look elsewhere for investment inspiration. This is particularly true in terms of equity fund portfolios whose gains were concentrated in the four main credit-card company stocks. Further, re-examining the main US fund investment objective averages for the fourth quarter of 2013, one finds that there was a major difference between the results of large-cap growth and their mid- and small-cap fund brethren. The large-cap growth was clearly the leader of all the main groups, and the mid- and small-cap growth were the laggards. The leader benefited from a handful of social media/info tech leaders. One of the lessons that I try to teach other students of the market is to pay more attention to the laggards than the current leaders when searching for future leaders.
“Time Horizon Portfolio” focus
If you utilize my time-horizon approach when looking at your investments, current momentum is very important for the one-year or trading portfolio. The switch in momentum is very important to the cyclical or intermediate-length portfolio. This second time-horizon portfolio is often what insecure investment committees focus on in making their judgments. There is a little bit of the English expression “penny wise and pound foolish” in their actions. The big money is earned and kept in the longer-term portfolios, and this is the hunting arena that I like.
The difference in time horizons between value and growth investing
When applied by disciplined knowledgeable professionals both value investing and growth investing have worked, however each uses time very differently. Ben Graham and David Dodd taught students at Columbia University and succeeding generations of analysts and investors the utility of value investing. In an oversimplified way they were urging analysts to carefully study financial statements to understand the nature of investments currently on offer. Their studies led to the identification of the gap between the current intrinsic value and the current price. In effect, they (value investors) arbitrage the difference with the belief that the current price will relatively soon reflect the intrinsic value they determined. Their most famous student was Warren Buffett who took value investing one step further by focusing on what the future value and price would be. At approximately the same time a Baltimore-based investment counselor was developing this into his theory of growth stock investing and he was T. Rowe Price.
I have memorable experiences as an student, investor or more to the above. David Dodd was my professor; T. Rowe Price* (the a firm) was a client and subscriber; for many years I have invested with Berkshire Hathaway* and attended its annual meetings. Most recently, I was awarded the Ben Graham Award by the New York Society of Security Analysts.
What value investors are looking to do is to get a bigger piece of the available pie, whereas the growth investor is betting on a growing pie and quite probably one that has a different taste. The growth investor needs to know the current financial statements; the value they bring to the exercise is a well-reasoned view of the future and some luck. (More on that later.) As we live in a global space where there are product developers/inventors and markets everywhere, one of the areas for some of our longer-term sophisticated accounts is in funds that invest in Asian science and technology. A recent article by J. Michael Oh, the portfolio manager of the Matthews Asia Science and Technology fund, makes the point that the rising standard of living in many Asian countries will allow new markets to “leapfrog” over the stages that developed countries had to go through. One example is in many places of the world the population has jumped directly to mobile phone use without first having landlines. My background years ago was as an electronics security analyst, thus my inclination is to think of some electronics developments as enhancements to our present gadgets. Michael Oh would suggest that I might be missing the biggest advances. He is very bullish on the improvements in medical products and their vast Asian market potential.
Is Google nuts?
This is the question that the Financial Times asked in an article after it was announced that Google had paid a big price in terms of current valuations for Nest, which is headed by Tony Fadell, a critical developer of the iPod for Apple. The firm produces devices that through iPhones or other hand-held devices can remotely control temperature and other elements in a distant home. His pitch is that he wants to re-imagine and reinvent the unloved products we all have. I have no idea whether his work will ever produce earnings per share for Google, but it is not a dumb company and clearly Google has views about the future. They need, however, (to quote a line from “My Fair Lady”) a little bit of luck.
“Getting Lucky” is the title of Oaktree Capital Chairman Howard Marks’ latest thoughtful letter. In his memo he decries those successful people who do not recognize the elements of luck that contributed to their success. He shares with us the elements of luck that contributed to his and Oaktree’s enormous success in credit and bond funds. He focuses on the accident of meeting people born in approximately the same year that happen to work in the same large company or become close just because they were in college together. He gives a number of good examples in terms of his life, and those of Bill Gates and Joe Flom. Howard suggests that successful investors succeed more often than not when their expectations work out, or as he says, “Performance is what happens when events collide with an existing portfolio.” Luck has a great deal to do with timing, as Marks quotes an old adage, “Being too far ahead of your time is indistinguishable from being wrong.” (I will be happy to send my marked-up copy of his letter to any of my subscribers.)
Will either Michael Oh’s fund or Google produce good future results in a timely fashion? I do not know. What I do know is that they are both looking for a bigger pie that will be different than the present one. I also believe that this kind of thinking is an appropriate part of sound long-term portfolios.
What do you think?
Disclosure: *Stocks either owned by me personally and/or by the financial services fund I manage.
This was previously published on Inside Investing at the CFA Institute.
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A. Michael Lipper is a CFA charterholder and the president of Lipper Advisory Services, Inc., a firm providing money management services for wealthy families, retirement plans and charitable organizations. A former president of the New York Society of Security Analysts, Mike Lipper created the Lipper Growth Fund Index, the first of today’s global array of Lipper Indexes, Averages and performance analyses for mutual funds. After selling his company to Reuters in 1998, Mike has focused his energies on managing the investments