We are bombarded with hundreds if not thousands of bits of ‘news’ and observations each day. Separating those that are important enough to impact our investment actions is one of the keys to long-term investment success.
One useful filter is to separate the incoming into time buckets. The first is a cause for immediate action, before too many others do. The second are those significantly impactful inputs that are likely to change extended periods of investment results. Of course, the biggest bucket is for discards due to lack of value and/or integrity.
The sorting mechanism that can be described mathematically. The first can be described as the prime derivative. It contains factors that are slow to change most of the time and are likely to shape the results at the end of the investment period. Demographics is an example which encompasses all those alive today and their inter-relationships.
Other examples include the number of consumer units vs. the number of producing units, the interactions between productivity and income, the interactions of health and wealth, the size of the agricultural community to the quantity and quality of food produced, etc. These factors tend to move slowly.
The second bucket deals with the rate of change in the factors impacting the items in the first bucket. These factors are more driven by psychographics or how people feel at a moment. They are volatile and can change rapidly, as well as reverse direction. The content of the second bucket can be described as the second derivative of the first.
Apparently, we have entered a period where the track of the second derivative is getting much more attention than the first. Liz Ann Sonders of Charles Schwab is quoted in Barrons as saying “better or worse matters more than good or bad”. Someone else has said “after driving 70 miles per hour, no one likes driving at 55 mph”.
Second Derivative Hot Spots
For portfolio managers who are generating much worse returns in 2018 than 2017 and are thus dealing with career risks, the following are some of the hot spots currently causing concerns:
A contrarian might focus on the following items:
Long-term investors use a telescope not a microscope
Looking through the current malaise and all but certain recession, followed by a certain recovery, I focus on fulfilling the reasonable needs of future beneficiaries. The list of items from the first bucket or first derivative are as follows:
While most of the developed world’s population is stagnant, with an aging population that will need to find some retirement support, the developing world is producing both workers and consumers.
In the developing world the levels of schooling and healthcare is improving. Technological developments will produce more value and at lower prices. There will be a shift of savings from the developing world to the developed world to help meet retirement purchases.
Because interest rates have been constrained, valuations are acceptable for long-term investing.
Source: Michael Lipper City Wire