Investing Time Before Investing Money

Crazy busy few  days but have had a couple of things kicking around in my head to blog about.

First one is that on ETFIQ this week Kristy Akullian from Blackrock referred to duration as an "unreliable source of diversification." I've been calling it a source of unreliable volatility for a long time now so that is interesting that maybe some big shots are starting vocalize this sort of idea. Note, I am assuming she has never read this blog, I do think though that a couple of people at Blackrock are drawing a very obvious conclusion.

A reader threw down a terrific question that I think tries to dig in on some nuance in the investment process. They wanted to know "where to put your trust" with regard to alternatives. There can be challenges with sorting out the strategy, the market and the managers which can make choosing difficult. Things can go wrong, they point out.

Well, I have an answer and it may not be very satisfying! In the earliest days of my blogging at the original URL, I would occasionally describe the blog as a look over my shoulder at how I navigate market cycles and learn more about portfolio construction and management. Sidebar, never stop learning. So in the context of looking over my shoulder, this started long before 2004 when I started blogging and before I was a portfolio manager. I've always done a ton of reading, learning about strategies way before there were retail accessible products. So I've been collecting information for decades.

The easiest example was learning about blending correlations from reading about Jack Meyer who ran the Harvard Management Company (the endowment) and who had strong opinions about timberland as a diversifier. There are some concepts then that hit right away based on many years of previous study. Client/personal holding BLNDX is a great example. By the time they reached out to me in late 2019, I had 12 years of experience (probably a little more) with managed futures. Despite my being a tiny RIA, in terms of AUM, they gave me a lot of time and I knew from talking to them, combined with what I had learned previously, that they were onto something. 

Client/personal holding BTAL is a long short fund. So called 130/30 funds are also long short. I looked into them a long time ago and it was easy to see that defensive attributes aren't really the story there, the ones I've looked at have equity beta so relying on getting the shorts right can be a tough way to make a living and has far more moving parts than BTAL which does have a defensive objective and meets it quite reliably.

Use the search bar in the right side bar of this site and look for "Simplify." I've been very skeptical of most of their funds and laid out why in quite a few blog posts. HEQT is one that I observed as working very well and then sure enough it got a 5 star rating. 

One filter that I think people can apply is complexity. We picked apart the Simplify Tail Risk ETF pretty early on for its VIX exposure. VIX moves very often have no rhyme or reason except when something bad happens and then a day or three after something bad happens. 

One way to think of what I've talked about with some of these that I actually use is that I take a very long runway before buying. I tracked catastrophe bonds for quite a while before getting in for clients. I had many interactions with the fund company for the cat bond fund I finally added for clients which I realize is a luxury do-it-yourselfers may not have but the recurring theme is investing time before investing money.

Test driving funds with my account for possible client inclusion has also been useful. I chronicled my run with QQQY which sells 0dte puts on the NASDAQ 100. Selling volatility is interesting but with the yields being touted when QQQY listed, my initial reaction was how the hell can it possibly keep up with that dividend but let's see what happens. Turns it out it couldn't keep up. Knowing what question to ask about a crazy high yielding derivative income fund isn't terribly sophisticated but knowing enough about various strategies by virtue of time spent is the real tool to focus on. 

The case of TLT and TLTW (the covered call version of TLT) is useful too.

Where I've talked about the crazy high yielders not being proxies for their underlying reference security, think YieldMax, something like TLTW probably is a proxy for TLT. This reiterates the point that you have to want the primary exposure, that needs to the be priority for, well anything, but today we're talking about alts. The ReturnStacked funds with bond exposure all have a bit of duration with AGG-like exposure or longer treasuries. You have to want that specific exposure for the funds to make any sense. TLT/TLTW is a good example because how far away I want to be from this part of the market. 

Some personal news. Walker Fire, the volunteer fire department where I live and where I've been the chief for 13 years, just got this truck from a department in southern Pennsylvania. 

Almost two years ago we got a grant for the red one below.

Although they look similar, the red one, a 2023 International, is a Type 3 engine for wildland fires. We are able to send it out before and after the worst of our fire season to fires outside our area which brings revenue to the department. The plan was for that revenue to start replacing the older vehicles in our fleet and the green truck is the first one. The green truck is a Type 1 which is for structure fires. There are different capabilities between the two and different equipment. 

The Type 1, the new green one, is a 2004 with very low miles and very low hours on the pump. It was their second due engine so it didn't get used much and they took great care of it. We are incredibly lucky to have found it. 

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.