Good judgment is the result of experience and experience is the result of bad judgment. Mark Twain
If you are a parent, or have been a teacher, you are probably familiar with being placed in the position where you are essentially a referee. Two of your children are squabbling over something rather trivial, and it escalated into a physical confrontation. Both are upset, and your spouse has handed the matter to you. The kids eagerly await your decision as they realize the situation is not good (both have minor scrapes from the altercation). As judge and jury, if you are placed with the awesome authority of determining fault, it is incumbent on you to understand the entire context of what took place. Where were the kids? What time of day was it? What was taking place before the incident? What was the dialogue or relationship like with the two kids preceding this? Were there any other siblings or kids involved? What kind of injuries resulted from the incident? As part of this investigation, hearing each child tell their version of the event is part of a being a neutral arbiter. After collecting all of this data, and probably hearing from their mother about what took place, you dole out the decision. There is usually some kind of disciplinary action, and if the incidents continue, more severe consequences are administered. For anyone having to make decisions, judgment about choices involves thinking through different scenarios. With this in mind, let’s turn to the investment world on why this matters.
Unless you are part of a large corporation which brings in millions of dollars of profits each year, resources are typically scarce. Even for large companies which do generate a great deal of cash, there are always constraints on capital. There is debt service, there is research and development, payroll, rent, salaries, legal concerns, maybe an acquisition, a spin off, or a merger to consider. Unlimited capital freedom exists for very few people or entities, so making decisions about the optimal use of it determines future outcomes. For investors, it is why the question of capital allocation for management teams becomes critical. Great management teams put money to use in a way which makes the most of the dollars they have. The decisions involve determining what the returns on capital of the current operations are, how they might be improved, and what reinvestment possibilities will lead to higher future returns. External acquisitions or mergers must also be compared, along with potential stock buybacks. You can see these are not simple decisions, and many factors must be considered, especially the competitive arena of each company. As an investor, you can choose to place your capital in whatever asset class you want. If it is in equities, there are all kinds of instruments to consider, including individual companies. The vast majority of individual companies don’t have great returns on capital, which is why making good decisions is so critically important. Like the experienced parent or teacher, it means gathering lots of information from a wide variety of companies and sources, before money gets spent. When you throw in the wide range of industries, interest rates, currencies, geopolitical events, and taxes, well, unless you are Davey day Trader (Dave Portnoy of Barstool Sports), there is much to consider, and you are probably going to make plenty of mistakes. Mark Twain was right on the mark.
In the markets this week, the major news came from the Federal Reserve when they altered the policy a tad on employment and inflation. Essentially, Mr. Powell said they will focus on employment and if inflation runs more than the 2% target, they will not raise interest rates. Makes quite a bit of sense considering where the economy currently is today. Along those lines, here in Las Vegas, MGM Resorts announced they are laying off 18,000 employees. Earlier in the month, American Airlines did the same with nearly 20K of their workers. All over the country the layoffs are severe, totaling nearly 200K workers. You can see where Jerome is coming from, can’t you? It was a pretty light week for earnings with the headlines coming from Salesforce as they replaced Exxon Mobile in the Dow Jones Industrial Average. Pfizer and Raytheon were also booted, replaced by Amgen and Honeywell. The Dow is the only price weighted index, and it has lost it’s stature among investors in part because of the unique way it determines inclusion (absolute price). The decision to get rid of Exxon means Chevron is the only energy company of the thirty Dow Jones Industrial Average entities.
In the political world, the Republicans held their convention this week and it was vastly different than the one we saw from the Democrats a week ago. Like the earlier scenario we painted with a parent, voters are taking in all the information to come to a decision on who they think should lead the country over the next four years. The difference is stark and the decision is quite important. I hope you enjoy the last week of summer and the long Labor Day Weekend.
Thank you for reading the blog this week, and if you have any questions about investing, please email me at firstname.lastname@example.org.
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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 CFA designation does not mean Y H & C Investments will outperform broad market indexes.