Dividends and The Global Investment Outlook in a Late Stage Cycle Bloomberg Global Business Forum 2018

In the last few days of November, Bloomberg Global Business Forum 2018 had 3 guest speakers who are worth listing to: Mary Erdos CEO of JPMorgan Chase Asset Management; Jim Coulter of TPG; and Ken Griffith of Citadel Securities.

Question was asked what Lessons have we learnt?

Mary – 2008 was a lost of confidence in the banks and financial institutions.  Some of the problems were small changes that were thought to benefit the system did not for example making mortgages easier (2 Presidents believed a citizen being a home owner was better off than a renter) however the lower standards caused 40% of mortgages to be underwater with a 5% decrease in house prices. Another problem was changing the loan ratio from 12:1 to 35:1 and in 4 years the industry was overleveraged.

As individuals: if something is too good to be true, invariably it will be.

If you do not understand what you are buying, do not buy it.

If you invest in pools of underlying securities, that is not diversification. Diversification only happens if everything is not related to each other.

You need discipline and when asset prices go up, take some money off the table or sell to have cash or readily cash to take advantage of opportunities.

Ken – 2008 was the collapse of the housing market.

Quantitative Lending tries to encourage people to take risks. Debt is getting higher. If you look at the fundamentals, you are missing the added story of government’s role and activity in the economy.

Citadel is a hedge fund as well as a market maker. The role of the market maker used to be done by the banks. The old story of JP Morgan rescuing the market was replaced by government and the banks. The next time around when the government brings the players to the room, not everyone will be a banker. Market makers try to ensure the buyers and sellers are efficiently matched, so confidence in the system remains.

The first person to sell are those without the ability to forecast prices or not see the bigger picture of what prices should be? Which ones are unmatched? Citadel uses AI and big data to examine thousands of prices to see a bigger picture.

Jim  – from a private equity perspective, we try to look 4 to 5 years forward not day to day. In the 20th century, the product that dominated many industries and events was oil. In the 21st century, we see the dominant product as big data. How to use it both to sell and to make life better for everyone. One small example of selling is who should be a spokesperson for a product, TPG owns CAA. They use social media to figure it out as well as AI.

In private equity, which means companies do not trade on the market, it has grown to be an asset class of $900 billion which did not exist 5 years ago and has more than 250 companies worth a billion or more.

What danger signs do you see?

Jim –Constructive Paranoia or one hand it is very exciting or many opportunities. On the other hand what use to happen is companies tried to become better everyday; now there is stability for a time and instability happens, then stability, how do you manage the cycle? We are trying to invest in particular companies that can provide growth through cycles of the economy rather than a group.

Ken – there are no neon signs that will tell you when a downturn is happening. What you need to do is while see positive signs always managing for tail risk and ensure cash is king. One concern is in America, the US can print money there is an inflation risk but not a liquidity risk. In Europe, countries can not just print Euros, there is a process.

Mary – JPMorgan Chase does hundreds of stress tests everyday. We worry about downturns, however remember the power of compounding in the market and to be out of the market and miss top 10 days you cut your return in half; if you miss the top 30 days you have negative return.

There is great opportunity, but ensure you examine your portfolios regularly and have cash to take advantage of opportunities.

Linking to dividend paying stocks, having the dividends, ideally growing in size every year allows you to have cash to do something. Sometimes it is to buy more of the company, sometimes to ensure diversifications, the good thing is for the most part you will have time on your side and you will continue to do your homework to take advantage of opportunities.

There are more questions than answers, till the next time – to raising questions.

 

 

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