A Lesson On Black-Box Investing: Kurt Lindner And The Lindner Dividend Fund

What is quite amazing is that Mr. Lindner was able to produce such a great record using a formula approach to investing for so many years. But then, he happened to be in the right place at the right time. His successor Mr. Ryback had the bad luck of being in the wrong place at the wrong time. Today we have seen an explosion in the use of computerized trading based on algorithms created by computer scientists, under the direction of academics in the fields of economics, finance, and psychology. These are essentially a “black box.” Granted, they may work, but if they do, neither you nor myself will ever know of their existence, as the creators, like Mr. Lindner, will lock them away for personal use.  What we do see are an unlimited number of investment products based on some statistical data that worked in the past.  We see the promotion of multiple computer driven investment management programs.  This list can go on and on.  For those who choose these offerings, just remember that they are designed to make a profit for the creators and salesforce. Your returns will be whatever is left.

In addition to black box technology, the marketplace has changed dramatically in the last ten years. The most damaging change for the few investment counselors like ourselves is the reduction of the number of companies available for direct investment on an exchange. In 1996 the number of listed companies reached a high of 7,322. In 2015 the number of companies was down to 3,700. Today, with a limited number of initial public offerings, the continuation of mergers and acquisitions, and companies going private, the number could even be less. 

This reduction in the pure number of companies combined with the fact that “big money” (the pension, profit sharing, 401k plans, and large endowments) has decided to invest in products that track the performance of the S&P 500 has created a top-heavy market place with an average higher price. To make things worse, conservative interest bearing investments do not offer a sufficient return to preserve purchasing power, let alone produce a positive real rate of return.

The combination of fewer companies, higher prices, and limited interest rate alternatives has placed a very large damper on our own “opportunity set” of large, powerful and high-quality companies available at a cheap price in combination with US Government or FDIC insured deposits. This is not the first time we have had to address our opportunity set over the years, but since it has been close to a decade since the last time a major change took place, a little review of portfolio construction is warranted.

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Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments, is a registered investment adviser.  Anderson Griggs only conducts business in states and locations where it ...

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