Just Keep The Junk To A Minimum

The Washington Post wrote about ultra processed foods. The US appears to have less regulation around what ingredients can be used and increasingly over the the last 40 plus years we've seen ingredient lists on packaged food get longer as more and more seed oils get added to our food. 

As an example here is Skippy Peanut Butter's ingredients;

And Trader Joe's Peanut Butter's ingredients.

We eat Trader Joe's PB. Seed oils like the ones in Skippy are obesogenic and heavy in omega 6. Simplistically, Omega 6 is unhealthy and Omega 3 is healthy. Food has a ratio of Omega 6 to Omega 3. The higher the 6 to 3 ratio, the less healthy the food. Some food will have more Omega 3 than 6 but a ratio of like 2 or 3 to 1, Omega 6 to Omega 3 is considered healthier. Food processed with seed oils is usually much much higher than 2 or 3 to 1. This is the argument for keeping it simple and eating more foods with no ingredients that come from the edges of the super market not on the isles. 

The short version; just keep the junk to a minimum.

The President signed an executive order that creates a path to including crypto and private assets in 401k plans. This will sound like a contradiction but I agree with allowing this stuff into 401k plans, I just don't think too many people should buy for their 401k plans. 

I lean toward the idea that we should be free to make our own decisions, good, bad or otherwise. I've owned Bitcoin for a while. I have said of Bitcoin that the position started very small and that I will hold on until it either grows into a life-changing piece of money or craps out. At current levels, I would describe the position as a useful piece of money not life-changing. 

At my first post-college job at Lehman Brothers in 1989, one of the things I learned was to never take shares of an IPO that are offered to you. The generalization was that only IPOs you can't get shares of are the ones that are going to go up a lot.

I apply the exact same thought to private assets that will be available to retail investors via 401k plans or anything else. If you look you will find plenty of opinion pieces that the current push to make private assets available is about ginning up demand for product. 

The short version; just keep the junk to a minimum. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

A Difficult Decision

This post is fire related. 

On July 13th I wrote about the loss of the lodge at the North Rim of the Grand Canyon, it got burned over in the Dragon Bravo Fire. My wife and I have been up there probably a dozen times and we were due to be there this week too for short visit. 

As a matter of circumstance with personnel, Walker Fire was not available to send an engine up to that fire until today. That the fire is still going on all these weeks after it started is really something. 

Engine 83, pictured above headed up there today. 83 is a Type 3 Engine and for these types of assignments it can go out with either four or five firefighters. We only had four going and I anguished a bit over going in the fifth spot. 

In that July 13th post I used the word magical to describe the North Rim area. There was a calm and peacefulness to it that is hard to adequately describe but I think everyone feels it. Do you remember David Darst? He worked at Morgan Stanley and was on CNBC all time. The picture is from 2009, it was my only encounter with him and before we went on, we had a five minute conversation about the North Rim. He loved it too. 

This is the Supai Tunnel, it is about two miles down the North Kaibab Trail. My wife said she saw where the fire burned down to this point. It's about two miles down from the trailhead and parking lot. 

If the fire did burn as far down as the tunnel, then just about all the trees in this picture from Cathedral Point are gone.

The next picture is from Imperial Point. This area is a short distance from the lodge and North Kaibab trailhead and it too was burned over. The view wasn't impacted but the picture is taken from a forested area that is now gone.

Although the main area, the lodge and guest cabins are lost there was a real pull for me to want to go be part of the solution someway, somehow and while it may bug me that I didn't go, there are more reasons for me to have not gone. 

Day job related, this assignment would have been out on a truck doing structure protection (per the resource order that requested us) and the cell signal up there is almost non-existent. That contrasts with my two assignments as a liaison officer which is 90% in an office and if there is no cell signal the bring that in via a cell on wheels (COW) or lately with Starlink. When these assignments come in, personnel need to be prepared to stay for two weeks. Two weeks with internet every day would be doable, two weeks without internet would not. 

Walker Fire related, we have had what seems like a pretty weak rainy season, right now things are very dry and the Forest Service has the current fire danger as extreme. As the chief and living less than a mile from the station house where I can quickly get a truck out the door, taking off for two weeks while the fire danger is extreme seems like a bad idea.

In almost 23 years on the department, we've had three what I would say were legitimate infernos including this one in June which was the diciest of the three. We had water flowing on it within ten minutes of finding out this was happening. The smoke was much blacker a few minutes before I took this picture. 

Can a decision be both right and regretful at the same time? This one is. 

A Year Later, It Still Works

Last August we took a quick look at the Bridges Tactical ETF (BDGS). It's equity centric and has a process for risk on and risk off that allows it to vary its equity exposure and pairing that with cash proxies. Last summer it was 71% in cash proxies and today it appears to be 43% in cash proxies. Like last summer, the equity sleeve appears to have more volatility than the S&P 500. Most of the equity names are stocks that have 2x versions trading. Last summer I said it's sort of a capital efficiency effect or maybe a barbell effect. 

Since that first blog post, the fund has done pretty much exactly what it said it would do. Decent upcapture, so it lags plain vanilla market cap weighting, with less volatility. 

The comparison to HEQT still seems to be reasonable. Portfolios 3 and 4 also create the same effect. Portfolio 5 captures the current positioning but not fair to BDGS because the ETF can adjust the mix. Still though, Portfolio 5 is surprisingly close to BDGS' performance. 

A year later the strategy seems to be valid. No strategy or fund can always be best and any strategy will at times struggle, that goes with the territory but it's hard to argue with a fund that does what it says it's going to do.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Buffer Mania

Reuters posted an article that could be summed up as man there's a lot of defined outcome and derivative income funds and they're getting more complex. These are fun to look at and although I don't really do much with them, I get a lot of questions from people outside the sphere of my day job (firefighters and friends). 

The theory of barbelling yield out of a narrow slice of the portfolio seems to hold some water, my only client use is intermittent and more of a volatility tool, I do not have any of the crazy high yielders in my ownership universe. I don't use any of the buffer funds, but I would caution that if you want to use them, do not expect them to be proxies for the equity market. I haven't looked at a ton of buffer funds but I do think some can continue to function as a low vol, low return type of exposure. 

This is a fun one. BALT is a large defined outcome fund that we've looked at before. IYW is broad based tech and a long time client holding. ROM is a 2X tech ETF from ProShares. Technology should go up more than the broad market on the way up and down more on the way down which is why I chose it for this exercise but oddly, the idea sort of works with consumer staples (XLP and UGE) too. Interestingly, the blend of BALT and 20% exposure tech is very underweight versus the S&P 500 and almost exactly in line with the tech exposure of VBAIX, so as big of a sector bet as you might think.

I would have thought that this sort of BALT/tech mix would have done worse than 60/40 in something like the popping of the internet bubble. Using XLK and client/personal holding MERFX as substitutes, the drawdown at the 2003 bottom was the same as plain vanilla 60/40. IYW started trading just after the 2000 peak and BALT just started in 2021.

IRL, putting 80% into one low volatility strategy seems insane to me. Below, Portfolio 2 has 8 different low vol strategies with 20% in IYW.

Testfol.io has VBAIX's CAGR since inception at 7.16% which is noticeably better than the 6.46% available in our back test but I don't think the skew creates too distorted of a picture. 

This variation of barbelling can work but despite the back test I think it would be quite risky.  

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

The Craziest Article I've Ever Read?

But first, a friend sent an article written by Pim van Vliet titled No Asset Is Safe But Some Lose Less. The first part of the article lays bare the loss of purchasing power by just holding cash or T-bills over very long time horizons. A useful rule of thumb for framing this effect is that at a 3% rate of price inflation, expenses will be 50% higher in 15 years. 

Cash is both optionality and protection against short term volatility but the drawback is as van Vliet says, a loss of purchasing power. A 50 year old sitting on $1 million in cash and nothing else will have a lot less purchasing power when they get to 70. 

The other day I mentioned that part of the asset allocation process is figuring out what portion of a portfolio needs to capture whatever the equity market will give over the relevant time period. Figuring out how much cash is appropriate is part of that process too and some apparent overlap between van Vliet and me would be how much to allocate to lower vol assets that should exceed the rate of inflation but without the full equity effects of growth and volatility. 

The second half of the article then makes the case for lower volatility stocks, van Vliet uses the term widows and orphans. 

SPLV and USMV target different versions of low volatility. SPLV simply owns low volatility stocks and USMV tries to optimize a portfolio of stocks with various attributes to deliver a lower volatility result. The results of both are valid in terms of generally delivering on the objective as well as the growth rate. In the period studied, inflation compounded at 2.60% so SPLV and USMV check that box too. It's not a realistic expectation that they could keep up with or outperform simple market cap weighting but the tradeoff is a smoother ride. 

As we've looked at before, the low volatility effect can be captured using client and personal holding BTAL combined with simple market cap weighting. I weighted the portfolios to get very similar returns as SPLV and USMV but with much noticeably less volatility. Portfolio 5 tries to add portable alpha using a 2x equity fund and client/personal holding MERIX. Again with that one I tried to target a similar return and even with the huge weighting to a levered fund the volatility is less than both SPLV and USMV.

If we dial up the volatility of Portfolios 4 and 5 to get closer to SPLV and USMV, the respective CAGRs for 4 and 5 go up to 13.32% and 13.39%. The idea with market cap weighting plus BTAL is the opportunity for more upcapture. It is not the core holding (SPLV or USMV) that is the governor, it is the hedging device, BTAL. Clearly though, just owning SPLV or USMV would be simpler.

Now the crazy article. It was kind of an advice profile at the WSJ for a 44 year old woman who wants to retire at 61, take Social Security at 67 and (here's the crazy part) wants to be able to afford to move into a "continuing care facility" at 70. Is it just me that thinks this is crazy? It makes no sense to me. There are other things in there that I will touch on that also don't quite add up, it makes wonder if this isn't real. 

The link removes the paywall so tell me if I am wrong but what person in their 40's targets wanting continuing care at 70? 

Starting at 61, she is eligible for a $5300/mo pension (she works for LA county). At 67 her Social Security will be $1500 is today's dollars from a previous employer or a spousal benefit. Her main job is a librarian and she side hustles as a librarian somewhere else. She has a mortgage on her place and a larger second mortgage so that she could buy her ex-husband out of their home. There's about $400,000 in home equity and another $240,000 in other IRAs, part of which I am assuming is her rollover from a previous employer. Something that also doesn't track is a $900 payment on a $15000 car loan but maybe it started as an $80,000 car loan or something.

The planner being asked to assess her situation doesn't think she'll be able to afford to buy into continuing care at 70. I still cannot wrap my head around this goal. At 44, maybe she doesn't understand what 70 is. We've talked about the theory of not understanding what it means to be older than your age plus 50%. So at 20, you wouldn't understand 35 and at 44, you wouldn't understand 70. That could be part of the equation. 

My older siblings are 69, 71 and 73 and while I think they could all be exercising more, none of them are anywhere close to sniffing distance to needing some sort of continuing care. If you're 70 and reading this, you probably read that last sentence are thinking, no shit Sherlock. Of course bad things can happen to anyone at anytime but planning for age 70 when you're 44? This is presented as Plan A, not some sort of optionality-contingency. What is the logic here, if you know, please leave a comment. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

The Disillusionment Of Winning

David Epstein wrote about an interesting idea (new to me) called the arrival fallacy. The prompt was the recent press conference where Scottie Scheffler talked about the short lived joy, for him, that goes with winning a golf tournament. Winning is joyful for Scheffler but then "it's like, okay, now what are we going to eat for dinner?" 

This is relatable. I've talked before about my first job out of college at Lehman Brothers starting in the summer of 1989. I got into a program where you had six months to open 50 accounts that would go to one a broker that was your mentor. Open the 50 and then you become a broker. 

I can't begin to tell you how bad I was at cold calling and pitching people but I was able to get to 50 in four months which might have been a record, not sure about that but it was fast. Amusingly, someone came along shortly thereafter and did in a month. This guy could open accounts so easily that I swear he could get anyone to send him their last $10,000 to buy Texaco or Paramount (two of the stocks getting pitched in the office back then). It got to the point where they coached him to not open so many accounts because that's what he was doing, getting people to send their last, or only, $10,000 in to buy stock which didn't jibe with the business model. I moved on shortly thereafter but I am sure he went on to be wildly successful. 

When I completed this program, I got the offer for my own desk (jargon) on a Friday. I was ecstatic all weekend, legitimately ecstatic, I had arrived. I worked very hard and achieved a goal that I was told most people fail at. Then Monday morning came, I had to start over completely and I knew almost immediately that this was not what I wanted to do. I had arrived but really I hadn't done anything. 

This encounter with arrival fallacy was pivotal in my development as an adult. I've talked before about not really being a goal oriented person and that Monday morning feeling was a contributor. 

My approach has been more like putting in the work and following the progression toward wherever the work leads. With my day job, I started studying voraciously in the 80's, then all through the 90's when I was at Schwab not knowing where I would end up. The progression was going from a trader to portfolio manager. A huge kickstart came from writing, first getting published in Barron's in early 2004 and then starting to blog a few months later. Things worked out but there's never been any goals, I just stuck with it and went where it took me. 

Similarly I've never been believer in retirement numbers (goals) like "oh, I need $1.2 million to retire" because whatever you end up with is your retirement number, not some calculation out of Smart Money Magazine (remember that one?) you did in 1998. 

Sort of related, the NY Times had a commentary about writing letters, actually writing them, to your future self and the sort of introspection that goes with this subject or when you see what advice would you give to the 20 year old you? 

The actual commentary was not interesting but I think there is value in doing favors for the future you, doing whatever you can to make things easier for yourself when you're older, giving yourself as many options as you can. There can be a progression to this without having to overly focus on goals that could result in arrival fallacy.

While starting to save money in your 20's would be great, I don't know how many twenty-somethings make enough to do so. Hopefully though as you get into your 30's you can start to build something up in a 401k or the like. This is where financial optionality starts. At 30, it may not be possible to understand what it is to be 50 years old but 50 is coming and having sort sort of financial optionality akin to some level of financial independence is an unknown favor that 30 year old you is doing for the older you. It is an unknown favor because at 30 you probably have no idea or very little idea about what you will want at 50. 

Of course staying in good physical condition is part of this conversation. If 50 is going to come, would you rather be lean, strong and able bodied or the alternative? We all know people our age who look like action figures and people who are very sick, unable to do very much. While it is never too late to start, a lifetime of exercise is a huge physical favor and a huge financial favor. I don't think this needs to be goal oriented. I've been lifting weights very consistently my entire life. The metabolic benefits are endless and I want to be able to bend down and pick up heavy things for the rest of my life. If being able to deadlift X pounds or benchpress Y pounds motivates you, great, but being healthy doesn't have to involve goals. Great, you can deadlift some big number but as Scheffler might say, ok, now what are we going to eat for dinner?

A Fun Post For A Crappy Day

Friday was one of the craziest days in quite a while so let's keep it lighter with a few quick hits.

Barron's wrote about the so called Trump accounts which would be like IRA accounts for children up to age 18. These accounts could be funded up to $5000 stopping at age 18 and then left in the account to grow. It looks as though family and friends' contributions would not be tax deductible going in. There is also talk of a short window where the government would contribute $1000 to these accounts. I have not seen anything about how the $1000 would paid for. 

Let's game this out for someone who turned 18 in 1975, so today they would be 68 years old. Where coming up with an extra $5000 today might be difficult for a lot of people, lets assume $2000 instead. It looks like $2000 today would have been worth $181 in 1957 when this person was born. So assuming the same $181 contributed 18 times but not invested (due to the limitation of testfol.io), at 18 this person would have had $3258 in 1975 to put into an index fund. The first retail index fund hit in 1976 but please humor me.

The $3258 put into an index fund and just left alone would now be $896,000 after compounding at just under 12% all per testfol.io. This person almost wouldn't have needed to save for their retirement. There are plenty of behavioral mistakes that could get in the way of this sort of outcome and assuming the compounding number of 11.89% is correct, that seems too high to count on for the next 50 years. This sort of starting out type of account could still grow into a very meaningful piece of money.

More Barron's, they had a piece on healthcare costs which wasn't very interesting but there was a terrific comment to share. 

In my mid 80s, I'm working to enhance dividend and capital gains income by selling covered calls and cash secured puts on stocks and ETFs. This puts about 50% of our liquid assets to work. It generates nice returns on risk every week, month and year with, for me, minimum risks.

I've been doing this since shortly before we retired. It's a job and it's what I can do.

Everyone who is healthy, exercises, gets a lot of sleep and is able to do something to generate income during "retirement" should keep working as long as their brains and bodies will let them.

Only people with a lot of income yielding savings and investments (including great federal and state government pensions), can quit working, play, travel and pretend that what's going on in the world won't affect them or put them on Medicaid.

The first observation is that he has been making the effort to solve his own problem. I wouldn't focus on his strategy, maybe it's for you or maybe it's not, but his being part of the solution, realizing someone needs to do work on his portfolio, it sounds like he enjoys the challenge and maybe based on the rest of his comment, he's got the other aspects of his life dialed into. Taken as written, it's a great example of successful aging. 

Tidal ETFs (white label ETF provider) had a blog post about the manner in which derivative income ETFs and defined outcome (buffer) ETFs are making their way into an increasing number of portfolios. They note that investors are "no longer content with riding out volatility unhedged" and "raises questions about how asset managers and advisors are framing risk." You can get more color if you click through but it touches on some ideas we've been working with here forever and triggered an idea for a crazy portfolio idea.

Portfolios 1 and 2 obviously barbell the volatility and growth potential into narrower slices of the portfolio and when paired with BALT which is one of the larger buffer ETFs that we've looked at before. I would absolutely not count on BALT to capture the equity market over longer periods but it is pretty good at having low volatility and positive compounding. 

Instead of thinking of this as mostly a low vol alternative and levered equity, like we've talked about before, the 2x and 3x funds might be better thought of as equity with volatility overlays. At times, the volatility overlay will either help the portfolio or hurt it. It would have to overcome the volatility drag to be additive and logically, sometimes it will do that and at other times it would not. 

Tidal talked about different ways to use volatility and that's what the above idea tries to do. No matter how flawed the levered ETFs are, they worked out in this example to a reasonable outcome.

I saw this Tweet today;

 

MERIX is a client and personal holding. 

If you want blistering volatility, the APED ETF might be for you!

Just a quick word about today. I saw some pundits talking about what steps to take in case the last couple of days turns into something more protracted. We spend a lot of time here on ways to make portfolios more robust so that you don't have to react when crazy news hits that may or may not actually hurt markets. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.