Just in Time Inventory, Good Idea. Just in Time Stock Ownership, Bad Idea.

Published:

Authors:
John Micklitsch, CFA CAIA, President & Chief Investment Officer


It has long been held that one of the greatest benefits of the modern technology era is the development of just-in-time access to just about everything. This extends from access to real-time information on just about anything, to food delivery that appear at front doors with the swipe of a finger across a smartphone. As a consumer, information, goods and services are available when, where and how you want them. What a world to live in.

For corporations, access to real-time data has led to more efficiently run organizations. Today’s decision makers utilize cloud based, real-time, enterprise software systems to manage working capital and maximize corporate returns. One area in particular that has benefited from real-time data is supply chain management. Long lead times and overstocking issues are down while forecasting based on data analytics and matching inventory are the new norm. These developments have been extremely positive for Corporate America and even have some believing that the economy itself has forever been changed such that inventory-led recessions could be a phenomenon of the past. In addition, recessions that inevitably do happen could be far less severe than in the past, taking the form of mini recessions due to the avoidance of the big inventory overhangs that in the past could take quarters, and in some cases years, to work through.

One of the negative attributes of the just-in-time economy we live in is what it has done to the notion of long-term decision-making horizons. We see increasing amounts of short-termism in everything from the news cycle to the decisions sports teams make and unfortunately, the decisions some investors in the general population still make with their portfolios.

While just-in-time inventory has been a boon for how companies are managed, it is not a good idea for investors to practice with the ownership of those companies themselves. The following chart from JP Morgan illustrates the relationship between time horizon and the probability of positive outcomes with stock ownership (measured by the S&P 500).

S&P 500 Holding Period Returns

Charts courtesy of J.P. Morgan Asset Management. Source: FactSet, Robert Shiller, J.P. Morgan Asset Management Returns reflect S&P 500 annual rolling period returns except for one month returns which are price returns and do not include dividends. Represents period from 12/31/1929-12/31/2017. Charts are for illustrative purposes only. Past performance is not indicative of future returns. Guide to the Markets – U.S. Data as of June 30, 2018.

As the one-month, and to an extent, the one-year data shows, there is simply no way to effectively or consistently manage just-in-time ownership of stocks, especially after you factor in taxes and the inertia of getting back into the market when you are out of the market. It is ironic therefore, but a reality nonetheless, that what is good for the goose (companies) is not necessarily good for the gander (stock ownership).

The recipe for creating the highest probability for investment success continues to lie with the tenants of quality, diversification and time. Therefore, when it comes to your portfolio, it is best to leave the concept of just-in-time inventory to the Chief Financial Officers of the companies in which you invest, and not in your portfolios.

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