Technology Shines During First Half as Tariff Issue Lingers-
The happiness of of your life depends upon the quality of your thoughts.
When you go to college, the first two years of study involves meeting general requirements and then the last portion of your time is in your field of focus, otherwise known as your major. The general portion of your classwork has some flexibility in terms of choices, but mostly they are core requirements like English 101, etc. I satisfied one of these by taking Psychology, a course I despised. Sigmund Freud is considered one of the leaders in psychiatric analysis, and if you were asked to name the one person people identified in this field, it would probably be him. The study of Psychology is based on many of his theories. I hated every one of them and considered them complete garbage. I later learned Mr. Freud, the dean of Psychology, was a frequent user of the little white powder known as, ahem, cocaine. It makes sense, because a lot of the stuff I was forced to learn came straight from a planet you would have to be on drugs to come up with. Anyway, naturally, in the investment world, it turns out that psychology is quite an important matter, and this issue is constant when considering how to allocate capital.
Let’s take a look at the current market circumstance. Imagine you are Performance Paul, a fund manager of a 3 billion dollar mutual fund, or maybe a hedge fund. You are evaluated every year on your returns versus a market index. You have come to the intelligent realization there only a few stocks which have been beating the indexes, tech, tech, and more, tech, especially over the last few years. Being the brilliant strategist, you decide to own them all in larger percentages then a standard index. In the business this is known as piling in. You avoid everything else, including oil, banks, and retail as they have stunk the joint up for years. Low and behold, it has worked, and money has flown into your fund because investing ain’t that hard. If you are beating the index, you are a superstar. Deep psychological analysis is involved with this startling conclusion.
Of course, there is always the opposite side of the trade to consider, or as Charlie Munger says, ‘Invert, always invert.’ What if the technology leaders don’t start to do well? What if the other areas of the market, disparagingly known as value type stocks, start to work? Performance Paul might have to find a new name, like, oh maybe, Losing Lenny. The psychological choice is there because the question of owning what might be working, though dramatically overpriced, as opposed to buying the unloved and not performing, is one which great investors like Bill Ackman and David Einhorn, to name a few, have gotten wrong over the last few years. However, the thing about markets is they can change, and sometimes they change quickly. If you look back in history, in the 50’s there was a time when the popular strategy was to own the ‘Nifty 50,’ a group of companies deemed unassailable. Until it did not work, and those entities were not quite as dominant as once believed. Even further, guys like Buffet and Munger will never answer a question about what they are buying, preferring to keep it quiet about wherever value might be found. Psychologically, having the fortitude to buy when others hate that entity is not easy, especially when performance does not happen for a while. Of course, Freud never studied this stuff, he was busy, shall we say, with other things.
In the market this week, the continuing worry about tariff’s and the flattening of the yield curve made things tough on stocks. The financial sector was buoyed a bit by the second portion of the Comprehensive Capital Accounts Review, although Morgan Stanley and Goldman Sach’s were scolded about their capital levels. The larger investment banks still passed the test, but they have to remain at last years dividend and buyback ratios. The banks had thirteen straight days of downward pressure, so a little good news helped their cause. Amazon paid a billion to buy Pillpack, an online pharmacy operating nationwide. When Walgreen’s reported a good number but flat traffic, it’s stock got pummeled on the assumption Amazon will send Wallgreens pillpacking, so to speak. A few months ago, after Amazon bought Whole Foods, the same thing happened to Kroger’s stock, which has subsequently recovered. Consider that comparison, and that we are discussing investor psychology, what choice should you make about Walgreen’s, hypothetically that is?
Tomorrow, Mexico will hold their national election and a long time left wing politician, the lovely named Andres Manuel Lopez Abrador, otherwise known as AMLO, will probably be victorious. He has run on themes of opposing corruption and poverty (what politician doesn’t?). Interestingly, the area of Mexico he comes from has the most poverty in the country, where over 40% of the population is unemployed. His region is where most of Mexico’s oil is located, and he plans on building two large refineries to help build Mexico’s wealth. Mexico’s currency has dropped dramatically during the last 4 years and now sits at around 20 pesos per US dollar. I don’t think you have to be a genius to figure out what direction that one is headed. In the oil market, news that sanctions on Iran will begin in September and a draw down in supplies, along with strife in Libya, bolstered the price. Politically, the Supreme Court made all the headlines by ruling against unions being able to take out non member fees, and of course, Justice Kennedy retiring. President Trump will choose a replacement by July 9, and both parties are lining up for war over the selection confirmation. Next week, July 4 interrupts things as our country celebrates its founding with baseball, hot dogs, apple pie, and, hopefully, no mention of Sigmund Freud.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one's overall financial situation. The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.