Thursday, February 24, 2022

Just Because Someone Is Paranoid, It Doesn't Mean...

Before the stock market opened this morning I sent a note out to clients about keeping things in context, that there have been more military conflicts than most people can remember and that no matter the outcome, at some point the decline will stop then stocks will go back up and eventually make a new high, we just don't know how long that will take. War is bad for just about every aspect of life but not necessarily bad for markets based on history. I reiterated that I have no idea what the sequence of events will be. We have things in place to soften the blow of large declines and I think they are generally working. 

And right on cue, the S&P 500 closed in the green....by a lot....

On to today's main point about general preparedness. I tried to prepare portfolios for market upheaval a while back, mostly over concerns of price inflation but not entirely. 

Today I saw a couple of Tweets that I found to be thought provoking. One talked about the possible seizing of bank accounts of Russian people by the Russian government if the US/Euro sanctions prove to be very effective. I have no idea if that possibility is real but that's not what matters. I can't get to the point of ever thinking the US government would ever do something like that but I would say the steps Canada took over the Freedom Convoy were shocking. 

The other Tweet said something to the effect that, this is not a 20th century conflict. Hacking would play a much greater role with the example used of hacking a train to crash. 

Now, marry those last two paragraphs together, some sort of hack where American's financial assets are not accessible for a time. I don't think theft is the likelier threat, more like not having access to bank accounts to pay bills or buy food. I don't know how concerned to be about this. I naturally tend to assign very low probabilities to these sort of threats but there's no reason to totally ignore this possibility either. Having a little cash on hand if nothing else certainly is convenient. Having $100,000 sitting around the house seems excessive but the convenience of just $50 runs out pretty quickly. Next level, have some gift cards (we don't have gift cards for this threat). Next level after that, have some Bitcoin. We have Bitcoin but not for this purpose. We own it for the asymmetric potential and I don't want to have all the time into learning about Bitcoin only to see the touts turn out to be right and not own any. 

I will say I am more bothered about being hackable. I'll take being called crazy but I want no part of having my house on the internet, appliances, door locks and the like, or having something like an Alexa listening to everything going on in our home. Our cars are kind of old but I assume they are not too old to get hacked. I readily concede how extremely remote it is to have you car hacked. Our ATV is not hackable for whatever that's worth. 

The bigger point is mitigating problems that you can foresee. In life, this could include the things above or getting a couple of weeks ahead on groceries at the dawn of Covid (before the pandemic was declared) which I wrote about back then. In portfolio terms, this means something I have been writing about all the way back to the first version of this blog which is owning a couple of things that have a low correlation to equities just in case you get caught wrong-footed by the start of decline of some sort. 

That used to be a little more difficult, you could buy gold. You can still buy gold but you can also use a bunch of other strategies that used to not be accessible in retail products. I write all the time about the ones I use which include GLD, BTAL, MERFX, TAIL and a couple of others. 

The barrier to entry for this sort of safeguarding, in life or your portfolio, is pretty low. I think you just need to think about it a little bit. What are the biggest threats to whatever it is you care about? Ok, how do you mitigate those threats. Often, my thought process will use the words threat and nuisance interchangeably. I wasn't really worried about there being no food two+ years ago but I wanted to avoid the nuisance of long lines at the store or substituting to the point of eating crappy food for a couple of weeks or so. If you shop at Costco, there's no reason to ever run out of toilet paper. Just don't wait until you're down to your last roll. This is pretty reachable for most folks. 

Wednesday, February 23, 2022

Don't Call It A Dip!

Barry Ritholtz was on Bloomberg for what I think is his weekly appearance and today's conversation focused on whether or not to buy pullbacks or BTFD if you know that acronym and a couple of other things. 

On buying the dip, I both agree and disagree with what Barry said. He said it is very difficult to time the bottom on theses declines that come along, very few people can do he said. I agree with that idea, it is difficult to reliably bottom tick a decline. Enough tries and yeah, you'll do it a couple of times but that is not a reliable methodology.

I do disagree with the framing of the entire premise. I would say forget about trying to guess when bottoms are in, don't think of it in those terms at all. A long time ago I said something like the odds of a large decline are a lot less after a large decline. When we're in the middle of a 20% or 30% or 50% decline, and of course on the way down there's no way to know where it will stop, you have a chance to buy at a very good discount. It's a good discount, it will still be a good discount even if it goes lower before going higher.

The habit of adding to equity exposure after a 30% decline is very likely to have a very good long term outcome, even if you're "wrong" for the next six months meaning it goes on to bottom at a 50% decline. Peter Lynch is instructive here, "I don't know what direction the next 20% is but I know what direction the next 100% is." The S&P 500 closed today at 4225. In 2007 it peaked at 1530. If you added to equities after the first 30% down, or 1071, does it today look like a good decision? The timing was not very good in the short term but handsomely rewarded nonetheless. 

If the current decline turns into something more serious and you can buy more down 30%, how good will that decision be 10 years from now? Pretty good I'd venture even if down 30% is just a stop on the way down to 40% or 50%. 

In Barry's appearance, Lisa Abramowitz asked Barry if his firm was doing anything different, if they were sitting on more cash than normal and he said no they weren't. I got the impression that they normally don't have much cash in client accounts but I don't know. What I will say is that I'm a big believer in setting cash aside for clients who are taking income from their portfolios. No matter where this current move down bottoms out, we know what will happen. The market will stop going down at some point and then eventually it will make a new high. We just don't know how long that will take.

Once someone really accepts that as true then they stop worrying about the market and start to turn their attention to making sure their portfolio income stream is not disrupted. The way I do things, that can mean having cash set aside or selling hedges owned for clients that are meant to go up when the market goes down. The need to hedge against a large decline is much less after a large decline. 

Friday, February 18, 2022

Don't Take Stock Tips From TV Touts

The following pictures were Tweeted into a conversation about Cathie Wood, Jim Cramer and Draftkings (DKNG) stock.


That's a chart of Draftkings puking down over a period of months. Supposedly, Jim Cramer yesterday said on CNBC that she (Wood) was buying the stock near $50 back in October and rhetorically asked "who would ever do that?"


If the second picture is real, apparently Jim Cramer would do that. I gave up on CNBC years ago, preferring Bloomberg TV. I have CNBC on in the background maybe an hour/week, otherwise Bloomberg.

I have no idea what Jim has ever said about Draftkings but in its short life as a publicly traded company it has been popular and widely followed. In rocketed higher for a time and how has been enduring a pretty long downtrend. For all of those factors, it is certain that Jim talked about the name several times. Where he spends many hours a day talking about stocks on TV, being asked questions, giving opinions, reacting to news, I bet if someone spent the time they'd find positive and negative comments from him about many stocks.

If someone wants to follow his advice about a given stock then arguably they can't afford to miss anything he says. I perceive him as being short term oriented, certainly much much short term than me, clients have owned some stocks for 15 years+. If you are short term oriented and interested in DKNG then you might have tried to trade that 20% bounce higher between Jan 25 of this year and Feb 1st and then that next slightly smaller bounce that followed. 

Some people are good at capturing those types of moves but that is trading that is not investing. Are you a trader or investor? I'm not saying being a trader is bad but what is bad is getting caught up in the excitement when a tout comes on to talk about what is really a trade and you, like me, are an investor. 

One thing that is important to me to understand about any stock or ETF I might buy is what its market attributes are, not the company, that's a different but obviously important thing, but how it behaves in the market. More volatile, less volatile? What, if anything does it correlate to or does not correlate to. In this context, Draftkings is heat, a lot of heat. It is volatility. When you buy the stock, even if you bought two years ago at $17 on the way to $60, you are buying volatility, you are making your portfolio more volatile, maybe a lot more volatile depending on how much you buy. 

If you have a diversified portfolio then you likely have some volatility in there and that's ok, I'd say it's an important feature in a diversified portfolio when properly sized. DKNG is not my type of holding. It's a good bet (see what I did there?) that sports gambling will remain popular but human emotion is such a huge component of the business model that I'd rather add volatility with other holdings. 

A while back I added a mining and metals ETF for clients. There certainly is volatility in that sort of holding but human emotion is not a first level component of pulling copper out of the ground. There's emotion in market pricing of copper, I accept that, but that is not the same to me if that makes sense.

So down all this way, is DKNG a buy? I have no idea and I am not a buyer but if we all accept that sports gambling is not going away, then I might wonder can sports betting go on without DKNG? The answer there is probably yes but DKNG has great name recognition. A small gamble on something down 2/3rds that you think won't disappear is not a crazy idea. If you do that regularly, you will be very wrong on occasion and of course very right on occasion. If you accept that, then you know that the next gamble you make could be the one you're very wrong about. 

That's a type of complexity that can be rewarding but that the typical investor just trying to have enough money when they need it (retirement?) probably doesn't need to speculate on.

Wednesday, February 16, 2022

We Should Probably Take Social Security Early

But I'm not gonna.

I haven't been able to post in awhile, I've been crazy busy across my various constituencies. We have a huge project with my day job and at the fire department we are working on the upcoming wildland fire season which includes spooling up to apply for a grant for a new Type 3 Engine which kind of looks like the truck below. That truck, one of our firefighters and I took a 36 hour trip to Missouri to look at it, it won't quite work but it's a stunning truck in great condition. 


To today's post. Yesterday a client asked me what my opinion was on taking Social Security early. I've been clear forever that I plan to wait until 70, or pretty close as a matter of the circumstance when the time comes, in case I die young, my wife who is 6 years younger would get the biggest payout possible. Other than that reason, the other big reason to wait is you get more in nominal terms every month. I said to my client "although I plan top wait, there are probably more reasons to take early than to wait." 

Arguments to take it early that I've seen made include that you're spending less of "your" money every month, thus letting your investment accounts get larger. There's no guarantee that you'll live past the point of breaking even. By breaking even I mean that if you wait until 70 and then die at 71, you'd have been worse off because you went all those years not collecting, so "they," the government, won. If you wait until 70 and die at 100 then you won, you end up with more money in the long run. The breakeven is around 78. 

If you don't know the math, every year that you wait, you're payout goes up by 8%. The payout at 70 is 76% greater than at 62. In the context of taking it early, I'm not sure 62, the earliest, is ideal but if you want to take it early, then you need to do some spreadsheet work to figure out what is optimal.

It doesn't make sense to take it early if you haven't retired from your career job because the payment will be reduced, maybe down to nothing depending on how much you make. You get it in the end but then, you might as well wait. 

If your full retirement age is 67 and you take it at 67 but you're still working then 85% of your payout is taxable as opposed to 50%....sort of. The 85% kicks in when a couple on Social Security makes $44,000+. Instead of paying extra tax, if you love your work at 67 and it pays well, you might as well wait. There's no advantage to waiting past 70. At that point you're giving money away, more precisely, you're giving money to the government. 

I think more people are interested in retiring as early as possible than people who want to keep working. Is that right? The reasons, related to successful aging, to keep working are many. Challenged mentally, having a purpose, having more optionality with what you've accumulated in your investment accounts, having meaningful interaction with other people, having the opportunity to keep learning (depending on what you do) and there must be others. 

Almost all of those things can be found elsewhere like very actively volunteering, monetizing a hobby or finding a second act career that pays much less but that you love. If you've been making $100,000 but can make it work with some sort of part time gig that pays $15,000 that you love, then taking Social Security makes a lot of sense. It may or may not be ideal relative to your specific situation but generically it certainly can make sense. 

Once you start taking it, if you take it early, you're not stuck. You can suspend it up to age 70 if after not working or making less money you get another high income job, you can suspend it and it will continue to accrue higher at that 8% annual rate. There is also a circumstance where you can pay back what you've taken to get a higher payout later. I've never heard of anyone doing that and it doesn't make a lick of sense to me why someone would do that. 

The most important planning tool is to figure out your priorities. Loving my job makes it much easier for my reason to want to wait. No one else should care about my priority but the utility is figuring out what matters to you. You want to retire early and draw it at 62, go for it...if you can swing it. If you don't love your work but you can't swing it at 62, then maybe 64 would work and in the mean time your payout would go up 16% plus a little more for the cost of living adjustment (COLA) and you might have been able to save more money in those two years.  

Avoiding Overly Sophisticated Portfolios

Let's continue the conversation about all-weather generically and then the Cockroach Portfolio. First a comparison of the Permanent Port...