It All Comes Back To Optionality

The daily New York Times email led off with a bit about self improvement related to people "doing favors for their future selves." We have been using that exact phrase here for ages. There are big picture applications that we talk about in terms physical and financial benefits but also very immediate but mundane things like backing into a parking spot so it is easier to get out and doing the dishes tonight instead of letting everything sit in the sink overnight. 

Doing stuff now versus having it sitting there waiting for you, more the dishes and pots than the parking spot example, resonates with me. I really dislike having a bunch of work that I need to get done just accumulating, waiting for me for when I probably won't feel like doing it. Note that I don't know if the link will work, it's what came up when I clicked view in browser. 

The writeup was pretty superficial looking first at the emotional tradeoff of making sacrifices now for an uncertain future and then wonder when the payoff comes for doing favors for your future self. 

I figured this out early. Where I think it came from is my grandmother was a great baker. My favorite thing she made was mint chocolate cake with mint frosting. The frosting was the best part and my older siblings always told me to save the frosting for last, save the best for last. I started hearing that at a very young age and so it stuck. Save the best for last made it easier for me to think about favors for my future self along with a few other examples that I won't bore you with. 

It's also akin to playing the long game which has worked out well. From the fire department, I coveted one of these trucks from when the Forest Service first started buying them.

Financially, this was nowhere close to possible, not even a remote possibility for us. It took about 15 years but it finally happened in 2023 and I'm still young enough physically that I'll be operating it for years to come. Then we got another one.

One form of payoff, from this point I will call it optionality, is getting what you want and still being able to use it or do it or benefit from it. This is probably physical optionality.

Another form of self created optionality is either wanting to do something different (work related) or having your hand forced at work without being left desperate and scrambling, forced to do work you don't want to do which is probably financial optionality.

Physical optionality is created by regular vigorous exercise and financial optionality is created by making good decisions related to saving and spending. When I turned 50, I said being that age which implies having some experience, with a little money in the bank while still being able to get it done physically is a great spot to be in and that I imagined the 60's would be the same. I'll be 60 in April and that appears to be panning out which is not surprising. I already pack tested for the 2026 fire season which is the annual physical requirement of hiking three miles with a 45 pound pack in 45 minutes or less. Sixty is old for this but not elite, like many things, success on this front comes from understanding the task and marrying that with your capabilities. 

As far as the time tradeoff, the physical optionality doesn't seem like much of a tradeoff. Go find @mangan150 on Twitter. He preaches only lifting twice a week for about 30 minutes each session and then walking regularly. He also includes HIIT in his lifting sessions too. And for the little time actually needed when done with the right intensity, you're healthier and feel better now, not just in the future. I lift twice a week for closer to 50 minutes and I jump rope almost every day (less than ten minutes). Our dogs don't like to go on real hikes too often but we take them on a mile and half loop around our house that climbs a total 400 feet or 600 feet depending on how we go, we do that pretty regularly. It all takes very little time

Financially I would say living in less house than you can afford and not replacing cars every three years, I've been driving my Tundra since 2007. There is emotional benefit to going through with a little bit of a financial cushion which is a benefit now and in the future. The house angle may not stand up anymore. I perceive buying a house has become more difficult. Beyond the headlines, which I don't know what to make of, I know that were I live there are no more starter house in terms of cost. In terms of size, yes, but not dollars. Tucson has plenty of houses in the $300,000-$400,000 range which is much more accessible for younger people who make a pretty good living even if they're not killing it. 

All of these concepts serve to make life easier. If life is easier, it stands to reason that life would have less negative types of stress like worrying about money which makes life easier (yes that is circular).

Speaking of fire department stuff, we replaced our old brush truck with a new one. 

I may have told this story already but short version, we had to replace the truck. One of our guys had the idea of lifting the pump, water tank and all the rest off the back of the old brush truck and putting it on the new Dodge. This idea probably saved us $150,000. That's the truck, being picked up from getting the graphics applied this week. 

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.

Post 1000 & Risk Management

This is post number 1000 for this URL. My first blog address disappeared (short version) when all of that content, about 4900 posts, was moved over to a site hosted by AdvisorShares when I had my side gig there a while back. I wrote at The Maven for a bit but that sort of sputtered and however many hundred articles I wrote for thestreet.com are all still up.

First up, Corey Hoffstein posted this picture with the caption "as predictable as the daybreak." I think he was referring to a good fund having a long struggle and then doing well again. 

BLNDX is of course a client and personal holding. Yep, it struggled for a while. Any valid strategy will have periods where it languishes. Speaking of AdvisorShares, when I worked there, the CEO was fond of saying that when a manager struggles for an extended period, you should double down. I don't know about doubling down but certainly throwing in the towel runs the risk of being a bad decision. Probably.

The caveat might be a stock picking fund that is always trying to beat the market. The Fairholme Fund (FAIRX) might be a good example here. 

The manager, Bruce Berkowitz, a smartest guy in the room type but this has been a very difficult hold. If you play around with the time periods though yourself, you'll see there have been different runs where it has been closer or even ahead of the index but I'm not sure how you settle in and buy this one. BLNDX is systematic though. The equity sleeve uses index funds and the managed futures sleeve, like I said is systematic and if you've ever seen fund manager Eric Crittenden interviewed, he never second guesses it. 

Here's an interesting idea. 50% BLNDX and 50% gold.

Ok, that's interesting. If you simulate it though by replacing BLNDX which only goes back six years, with a mix of ACWI and AQMIX, you get a much longer backtest that is very unimpressive. Managed futures and gold had rough run for much of the 2010's. Managed futures is great. Gold is great. But don't get carried away.

And in a related article, Bloomberg said At Long Last Being Underweight Tech Is A Winning Strategy. I don't think this is the right thought process here for what has been kind of a sneaky rolling over for big tech. Not so sneaky? I don't know actually but either way, as we've said countless times, history has not been kind to sectors that grow to be larger than 30% of the index. Where most of the revamped communications sector came out of tech, you could argue that instead of tech being 34%, it's closer to 40%.

The risk from a huge sector weighting either resonates with you or it doesn't and this pullback is either the start of something or it isn't, I don't know but I do know that I don't want to chase this sort of thing. I've been underweight tech for a while. Said differently, excesses, like 35-40% in one sector, are prone to real pain. 

I think the most important part of risk management is recognizing it before the consequences hit. That much in tech is an obvious risk factor. Maybe it will never matter, I don't know but it is obvious and one that matters to me. There is no reason you need to be overexposed to the risks that matter to you. 

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.

Halting Redemptions...Permanently?

A couple of weeks ago I got an email promoting the Denali Structured Return Strategy Fund (DNLIX). It's more fixed income-ish, not an equity strategy.

It's a newer fund. We took a look at a few months ago. MERIX is a client and personal holding and I used CBYYX as a proxy for catastrophe bonds because testfol.io didn't have the right data for SHRIX or client/personal holding EMPIX. The general interest here for me is finding more strategies that have the above type of volatility and return profiles but with risk factors that differentiate from other funds I use. 

Related pivot, on Wednesday I sat in on a webinar put on by Nuveen about farmland investing. Similar to timberland, farmland is a fantastic diversifier. Equities/REITs in either category don't capture the effect very well. My belief in farmland (and timberland too) is great enough that I will listen to any presentation that comes my way. Nuveen has a non-traded farmland REIT which is probably surprising, at least to me anyway, and sure enough it does well.

Now this from the FT (everyone else covered it too), Blue Owl has "permanently" halted redemptions from some of its credit funds. Basically, Blue Owl is going to sell down holdings as it can and then return the money in drips and drabs. The implication is it will take a long time.

DNLIX is an interval fund. I already said the farmland fund is non-trade so no daily liquidity there either. 

I have been very consistent in saying I'm not going to go down this road for clients, and that is still the case but as we talk about frequently, all of these things will evolve and maybe farmland or timberland will make it into some sort of wrapper with daily liquidity that captures the effect. Or not, but there is no reason not to follow along for the things that interest you as much as timberland and farmland interest me. 

In the meantime, taking on the complexity, fees and illiquidity of the current wrapper makes no sense to me. Chances are you can find proxies that get 90% of the effect without the complexity, fees and illiquidity. 

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.

Selling Volatility Can Be Painful

It's been a rough go for the Tuttle Capital MSTR 0DTE Covered Call ETF (MSTK) since in listed last fall. It hasn't been much better for the older YieldMax version (MSTY).

If you add the distributions back in on testfol.io, MSTK is down 59% while MSTY is down 46%. The total return declines aren't that bad compared to Strategy's common stock which Yahoo shows down 52%.

Learning how to harness volatility as well as how not to do it has become pretty important to how I view things which is why we spend so much time looking at it here. Frequently, I talk about sifting through a lot to find something useful. That's what looking at funds like this is, sifting through things that would pretty clearly be very difficult to hold but there is information in watching how the crazy high yielders behave. 

Kind of related. Interesting idea, not being sarcastic, but getting hit in not quite a month of trading.

They filed for a whole suite of these but so far just this one and a gold/Bitcoin fund that has symbol ISBG which is down 25% in the same number of days. 

I sat in on a Webinar from WisdomTree about capital efficiency. They included this slide which we looked at a very similar slide a few weeks ago.

If you're interest in looking at that again, there it is but I had a another thought. Meb Faber Tweeted something about 60% S&P 500/40% gold looking an awful lot like plain vanilla 60/40. I couldn't recreate that but this is interesting.

Testfol.io can simulate certain things before when the respective fund actually started including DBMF which is a managed futures ETF. Backtesting managed futures this far back is pretty helpful. 

Managed futures looks more like intermediate treasuries (there is no simulation for AGG) than gold does until we get to late 2021. You can kind of see in the drawdown chart where managed futures worked relatively well when the internet bubble popped and the financial crisis which were both slow moving events, it got hit in the covid crash because that was a fast event and of course 2022 when it did fantastically well.

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 Pursuit Of Robustness

Bob Elliott from Unlimited Funds got interviewed by Brad Roth from Thor Financial which was posted at ETF.com. Bob has a fascinating background, he worked at Bridgewater for a long time and then started Unlimited a few years ago. Unlimited is up to four funds now and all of them offer some version of hedge fund replication. HFND is the original, HFMF is 2x managed futures, HFGM is 2x global macro and HFEQ is 2x long/short. What 2x means in this case is twice the volatility which might equate to twice the return but not necessarily. Part of the idea with these is that many liquid alts aren't volatile enough. 

With his background, Bob should be a great must listen but this interview was the best one I've heard for extracting useful tidbits. 

First, lets test drive 2x managed futures. In the interview, they talked about an allocation of 50/30/20 to replace 60/40 where the 20 goes into alts. 

For quite a while, the managed futures didn't really help much as the teens was a bad decade for managed futures. That struggle didn't really hold back relative returns though. Then in 2022, the managed futures did help both Portfolios 1 and 2. The early lag for Portfolio 1 is from having only 50% in the S&P 500 versus the other two having 60%. If you like the idea of 50/30/20, saying the obvious, you have less in stocks than in a 60/40 portfolio and stocks are the thing that go up the most, most of the time. 

They talked about HFND, Bob's first fund, being something of a fixed income proxy (my words).

Some clients own BALT as a fixed income substitute. The chart is interesting. Going back to QAI's inception, that fund has not done well but that might be a function of rates that were at 0%-1% for a long time. Now that rates are higher, that fund is doing better. I am surprised to see QAI ahead of HFND.

The motivation to use these liquid alts is to make portfolios more robust, the pursuit of robustness. Robustness does not mean perfection which I think is a great point.

The most interesting idea they talked about was that once you find robustness, you're not going to improve much from there. Basically don't mess with it because you'll get either diminishing returns or end up with something that's not as good. 

Interesting, what do you think about that idea? I disagree in terms of there are countless defensive tools available today that were not available when the Financial Crisis started in 2007 for example. Then fast forward to the crisis (small c for this one) for bonds with duration starting in late 2021. If the multi-decade, one way trade in bonds had ended in 2010 instead of 2021, there would have been far fewer fixed income substitutes to use instead of TLT and AGG. 

From my time at Fisher in 2002, they used the term capital markets technology which is what we're talking about. Buffer funds (no matter what anyone thinks of them) are an innovation, a new form of portfolio technology. When I bought RYMFX in 2007, it was literally the only managed futures fund. How often to I mention client/personal holding BTAL? BTAL didn't start until 2012. A few days ago we quoted Shana Sissel from Banrion saying that BTAL and managed futures are the most important diversifiers. 

All of this innovation has meant needing to sell less for defense than I did in 2007/2008. In terms of process evolving, I would rather offset downside with diversifiers than just straight up sell. It's much easier to get it wrong by reducing exposure selling down equities versus adding more negatively correlated funds. 

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.

Philosophy From Marshall Mathers

Let's start with this graphic from Gallup;

The trend probably isn't surprising, we are more divided and dysfunctional than we've ever been or certainly more divided and dysfunctional than we've been in a very long time. There are problems for which there is no visibility for solutions. I'm not sure solutions are even being worked on. This sentiment is a big driver for my harping the need to solve our own problems. 

Look, if you had one shot or one opportunity to seize everything you ever wanted in one moment, would you capture it or just let it slip? 

You probably recognize that from Lose Yourself by Eminem. This is our shot, our opportunity, we have to fix our own problems to get the most from our time here. To me, this means minimizing wasted time, worrying over things beyond our control, being unhealthy, sitting in rush hour traffic, really this is about living life on my own terms. So ok, if you agree with the polling in the graphic from the top down, that doesn't mean your life needs to follow that trajectory. Not following that trajectory may mean making a conscious decision, that "nope, that is not how I am going to spend my time." 

One way to waste time, is worrying to the point of panic over an investment portfolio which of course is a problem we focus on here. The stock market is going to go up long term whether you worry or not so might as well stop worrying. This is something that can be dialed in to avoid ever panicking. A validly constructed portfolio, combined with an adequate savings rate and avoiding panic will get the job done. That has nothing to do with beating the market. This puts an emphasis on constructing a portfolio that will allow you to not panic during events where others are panicking. 

Here's a fantastic passage from Steve Sears in Barron's;

While taking no action is always an option for true long-term investors, many others feel they must be in perpetual motion. This reflects how brokerage firms make clients feel with their marketing. Other people are under dire financial pressure and feel they must invest to offset expenses.

Whatever your motivation, let this column remind you of the importance of having a plan to handle volatility. You don't want to panic out of, or greed into, positions. You want to have a plan, and you want to be disciplined. If you do that, volatility becomes an important tool that helps, rather than harms, your interests.

Something else important will happen, too. You will develop a deeper understanding of how markets function, of normal and abnormal investor behavior, and you will arm yourself with a decision-making framework that is so critical to living a successful life—in and out of the markets.

The way we handle volatility is to build in things that pretty reliably smooth out normal equity volatility. I keep some things in place perpetually because "risk happens fast" and I also don't want clients to be overly leveraged to my reading every event correctly. Keeping BTAL and a couple of others means the portfolio is already at least somewhat prepared in case risk happens fast. If I can do a little more to spare some downside, great but I would count on nailing every single adverse event correctly.

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.

Problems That Will Never Be Solved

Yahoo hit on a subject that has been happening more frequently lately and that we looked at just once, the extent to which increases in Medicare more than offset the COLA bump to Social Security. As a made up example, maybe the COLA for Social Security is $50/mo but costs for the various Medicares go up by $70/mo.

The way things have gone, there is visibility in subsequent years for this to become a bigger issue meaning that in my example of a $50 COLA, Medicare goes up by $80 in the next year and then $90 the year after. 

My own take is that Obamacare accelerated the implosion of the healthcare system and we've made no progress in all these years to actually fix it. When Obamacare was first rolling out, one of the big arguments against it was that what they really wanted was single payer like other countries. Regardless of whether you think that would be a good thing or a bad thing, it is now so fouled up that single payer might be the only option. 

I don't know whether there is any will amongst politicians or voters (in terms of majorities) for such a thing and I don't know how I feel about it, I am simply saying we may have painted ourselves into a corner on the issue. 

The article said that premiums plus out of pocket costs total 1/3 of Social Security income and 1/4 of all income. “Retirees get this because they’re writing the checks now, but those nearing retirement need to realize that this is coming up,” That's a useful quote. Gen-X needs to start to understand this. 

What happens to your financial plan if half of your Social Security goes to Medicare premiums? Maybe that sounds ludicrous, but what if that happens? Is that a big problem, little problem or no problem? For readers of this blog, maybe this threatens margin of safety. If you're reading this, you probably have some sort of investment portfolio that will kick out an income stream plus whatever you are due to get from Social Security. 

Someone counting on $5000/mo in today's dollars from their portfolio and $4000/mo from SS might have to figure some things out if Social Security actually gets cut (don't forget about that threat) and then Medicare inflation continues at a higher rate than the SS COLA. Expecting $4000 might turn into getting only $2000. 

Here's a clip on Twitter of Dr Oz saying how much the country would be helped if people work one more year. The comments were generally pretty angry in terms of saying the middle and lower classes work longer to benefit the wealthy (read them yourself and see if you take a different message). The Yahoo article talked about delaying Social Security to get a bigger benefit which is always met with angry responses on these articles. 

What is your situation? How comfortable are you about your Plan A working out the way you want it to? Do you want or think you need a Plan B or Plan C? Forget the injustices and unfairness of the system because chances are we are all going to (hopefully) grow very old and then die without any of these problems ever having been fixed. 

So if the system won't get fixed, then we need to solve our own problem and we probably need to start working on that now if you haven't started already.

Part of the solution for everyone should be health. I try to avoid broad everyone should types of comments but is there anyone who thinks they should let their health go? People do let their health go of course but I don't think anyone would say that's a good idea. 

Copilot found studies that say the average 70 year old takes 4-5 concurrent prescriptions and goes to the doctor 4-7 times per year. A few good habits can push those numbers back to 80 or maybe even older which would make the decade of 70-80 much easier and much cheaper. 

Are you going to work? If yes, what will you do, stay at your job or find something new? Will you take Social Security early or will you wait? Do you have flexibility on spending needs/wants? Should you downsize? How much are you likely to have accumulated in your accounts when you retire? It that amount just enough, more than enough, not enough? 

Those are some of the questions to consider. This will not be a fun exercise. It involves exploring what maybe has gone wrong in the past or might go wrong in the future. Confronting those sort of things doesn't sound fun but is important. 

Let's finish on a lighter note, the documentary about the ABA called Soul Power came out on Thursday.

If you're a basketball fan and don't know about the ABA, I'm halfway through the second episode and it is fantastic. It's on Prime. Then after the documentary, get the book Loose Balls by Terry Pluto. The stories are fantastic. Marvin Barnes and the time machine, the Baltimore Claws, the story behind Julius Erving going to the Nets, the Lew Alcindor story, the Silna Brothers, Connie Hawkins, Darnell Hillman, I can't tell you how much fun this is. 

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.

Getting AI To Fall In Line

Barron's had a short profile on the recently listed iShares Systematic Alternatives Active ETF (IALT) which is similar compare to the longer tenured Blackrock Global Equity Market Neutral Fund (BDMIX), same managers running a slightly different strategy.

IALT is running three strategies, one is market neutral, the second is a "dynamic" macro strategy and the third is long only. The three will be combined such that the volatility will be in the 7-9% range. 

You can see the comparison. The idea with Portfolio 4 is that HFGM leverages up so I wanted to get a little closer to apples to apples with IALT. Portfolio 5 is a build it yourself version (maybe) but the volatility is way too high at 14% unless...

...you go further back, subbing in QGMIX for the newer HFGM. Portfolio 4 tries to tamp down the  volatility to be closer to BDMIX (cousin of IALT).

The performance of BDMIX is suspicious, trading flat and then turning up so markedly. Copilot said it was not a change in strategy, the fund started to do better because the various factors and markets it tracks began to do better so it is a function of patience paying off. 

The blend of momentum, macro and market neutral from Portfolios 2 and 3 in the longer backtest looks pretty good over the longer period but it differentiates from VBAIX by quite a bit. The extent to which that is a good thing versus a challenging thing is a toss up. In 2019 VBAIX outperformed by 850 basis points while in 2021 it outperformed by 700 basis points. That gets made up for and then some along the way but a point we've made before is that differentiation can be difficult emotionally which is worth remembering before building something that gets too far away from plain vanilla. 

Copilot likes the blend of those three funds, it notes the biggest risk would be some sort of event that simultaneously hurts risk assets like SPMO, "cross asset macro signals" impacting QGMIX and what it calls deal flow for ARBIX but when I said that ARBIX is more of a relative value strategy, Copilot softened up on that point. 

It said the biggest thing lacking from the portfolio was convexity which to me sounds like client personal holding BTAL. It didn't love BTAL, ranking it third best after managed futures and funds like SWAN which is mostly treasuries with long call options. SWAN should go down less than equities but get a kicker from the calls when equities rise. BTAL helps with SPMO but wouldn't protect against things going wrong with QGMIX and/or ARBIX.

Copilot then laid out ten macro strategies to stress test the portfolio but I am not confident it did it correctly. It included examples from 2017, 2018/19 and 2022 that could be bad for the portfolio but it did well in all of them. I pushed back on that and it rationalized that it was more of what could have gone wrong but didn't. 

This post has a couple of instances where AI gave an output that didn't quite seem to be correct. I've been asked questions about how to use AI and part of my opinion is that it is important to question outputs. It will go back and rethink answers which makes for more productive work. 

SPMO, QGMIX and ARBIX are all in my ownership universe. 

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.

Their Model, Our Funds

Alpha Architect Tweeted a link to its model portfolios. They are essentially the same batch of funds in different weightings depending on the asset allocation. So 90/10 has 35% in the S&P 500 while the 10/90 has about 4%. The models allocate between equities, alternatives and fixed income. There's no login required so I think sharing the details is ok.

Everything in the replication is in my ownership universe except SHRIX while CAOS from their model is a client holding. 

Their model has done very well. I think the only difference between it and the replication is QMOM and IMOM which target something called quantitative momentum. I added those two funds to the backtest to try to illustrate the challenges of holding them. The drawdowns tend to be pretty big and IMOM's outsized growth rate occurred just since November. A less impactful difference (probably) is the heavy exposure to SCHR which is a Schwab treasury ETF that has lagged our fixed income substitutes. 

I thought I wrote about this model before but couldn't find it in the archives, Copilot couldn't find it either.

If we replace HIDE in their model with Cambria Trinity which is think is similar in terms of a lot of trend and volatility, we can go back a few more years. 

Their model clearly outperforms VBAIX but with roughly the same volatility, probably because of QMOM and IMOM. I think their concept is well put together, this is just another example where we can learn from someone else's valid concept and marry it with our own ideas. 

I'll close with a quick bit of capital efficiency history.

Corey concedes that his mention of QDSIX might benefit from hindsight bias.

Portfolio 3 just kicks out GOVT and replaces it with QDSIX, so no leverage in the portfolio other than the extent that QDSIX might use leverage. QDSIX has done much better than GOVT with only slightly more volatility. We've mentioned QDSIX a few times over the years but Portfolio 5 better captures the approach we've blogged about here. 

Most of the people talking about capital efficiency and products providing access rely on plain vanilla bonds with duration but as we've seen countless times, a similar effect can be created without the complexity of the leverage or the volatility and unpredictability of the duration. 

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.

Scathing Rebuke Of Bitcoin

Larry Swedroe went off on Bitcoin. His substack post reads like he's angry. There are some points I agree with and some points I do not. 

The most recent decline, Larry says, proves that Bitcoin is not an inflation hedge in a time when reported price inflation is running above target and while gold is doing so well. 

The table only goes back five years and it takes in the recent crash through yesterday. Since Bitcoin's inception it has compounded at 137% versus 9.8% for gold and 14.8% for the S&P 500 while inflation has gone up by 2.58% annualized. 

There's nugget about Berkshire Hathaway that if it fell 99% it would still have outperformed the S&P 500 since Warren Buffett took over. Applying a similar thought to the price of Bitcoin, I asked Copilot how far would it have to fall in order to have merely doubled the rate of inflation since its (Bitcoin's) inception. Copilot said Bitcoin started at a nickel and that if the price fell to ten cents, "yes ten cents," it would still have doubled the rate of inflation. Based on the testfol.io data to Bitcoin's inception, that tracks but let's assume Copilot is off by a magnitude of 1000, it could drop to $100 and still be far ahead of inflation. 

Point conceded that holding it since inception is not realistic but I believe the five year table is realistic. 

Larry says it's not a haven. I can probably get on board with that because it certainly is not reliable. In 2022, testfol.io has inflation running at 7.04% and Bitcoin up 57% that year. The next year, inflation clocked in at 6.46% while Bitcoin fell 63%. The latest decline doesn't prove anything in terms of it being an inflation hedge. A four month spell doesn't prove or disprove anything. What if four months from now Bitcoin is at $130,000? 

He's correct about the relative lack of history. Fifteen years is not nothing but pretty much is nothing compared to gold. He also talks about the touts constantly reinventing the narrative which they do, I think implying charlatanism. I don't know how you observe Michael Saylor and not conclude he's a charlatan. All of the negatives can be true but it still can protect against inflation. Is the current decline in Bitcoin much different from gold's decline starting in late 2012 when GLD fell from $170 down to $106, 39 months later?

Inflation compounded at just 78 basis points in that period while gold negatively compounded at 13%. How about the period from August 2020 to October 2023? Inflation ran at 5.61% annualized while gold negatively compounded at 2.86%.

I agree with Larry on most of his points but not the big point. For my money, Bitcoin has never been anything but asymmetric opportunity but it clearly has protected against inflation even if it never does so again and four bad months proves absolutely nothing (repeated for emphasis). 

A pivot to a very academic article from the ReturnStacked guys taking the other side from me about adding duration to a portfolio. The conclusions rely on how things should work in a manner that I am not comfortable doing. It starts out acknowledging that in the current "flat term structure" it is "tempting to see duration as uncompensated risk." We've obviously been using that phrase for quite a while. 

This is rebutted by saying "misses a crucial point: bond yields act like gravity for long-run returns" and then that idea is defined in detail. "As yields rise, they drag present returns down but simultaneously lift forward-looking expectations. In many ways, all changing yields really do is push and pull returns across time." Cool if you agree and it is academically correct but I think of that as being pretty oblivious to having money already exposed if yields continue to rise. If you buy a ten year bond yielding 4% and then prevailing rates move up to 5%, the price of the bond will drop about 9%. For a 20 year bond, it will drop about 14%. 

There was then a long discourse about the role of inflation expectations in bond pricing. Academically important but how wrong did that turn out to be from the late 2010's on? 

The paper delved into the folly of trying to predict what interest rates will do. Agreed. But back to the idea of adequate compensation for the risk taken. Believing that 4% is not adequate for ten years is not an attempt to predict interest rates. I have no idea if ten year yields will ever get to a point where the compensation is adequate but 4% is not for me. If that is adequate for you, then you should take it. 

Reading through, there is a tremendous reliance on bond markets doing what they should as I would phrase it which is not a bet I would make with my money or client money. 

I'll close this out with the paper's shift to implying that bonds are the only diversifier versus equities. They obviously don't believe that but the paper took a very binary approach, bonds or nothing to diversify. They say there is a need for different return streams which yes, we have found many to blog about and that I use for clients with volatility profiles that I think people want from bonds as well as yields (in some cases) and total returns (in other cases). 

I've been using bond substitutes for a very long time which does not make the process infallible but long term readers have seen the thought process come together and then get implemented. There's probably not much of an academic rebuttal to what ReturnStacked is arguing but I've been at the very least, grossly underweight duration for 20 years, avoiding it entirely along the way. Twenty years is a long time in relation to a normal retirement span and even a normal career span for a portfolio manager. 

Yes there are certain functions and attributes bonds should provide but I would not tunnel vision on how things are supposed to work. 

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.

Stop Fidgeting

We had a structure fire this afternoon, right after the market closed so this post will be very short. Not much drama in the picture, the fire was contained to the chimney and was knocked down very quickly.

But I do have an analogy between fire trucks and managing an investment portfolio.

The red fire truck is just over eight feet wide, accounting for the mirrors, it is between nine and half feet and ten feet wide. The door right behind it is 12 feet wide. Once you line the truck up correctly, you can back right on in very easily. 

Someone new tried to back it in the other day after our regular training and was fidgeting with steering wheel so much that they were way off center, making putting the truck away much harder than it needed to be. 

Once you line up your portfolio correctly, it will get you where you need to be. Constantly fidgeting with the holdings, trying to optimize for the thing that just happened will make participating in the market much harder than it needs to be. 

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 Legend Of The One Fund Portfolio

Meb Faber's most recent podcast had a couple of interesting things to say about trend following and one thought provoking idea that we've hit on few times here too. 

"Trend is the premier diversifier" for a diversified portfolio and he talked about allocating more than what I think we usually talk about here. The Cambria Trinity Fund (TRTY) allocates 35% to trend. Not allocating enough to trend is one of the biggest mistakes investors make he said. Trend doesn't have to just be managed futures for this conversation, it can also include the momentum factor for equities. There have been a lot more managed futures funds getting listed but also more equity momentum funds too including one from Motley Fool with symbol MFMO. I mentioned MFMO because right or wrong, I associate quality and value with Motley Fool as opposed to momentum.

An interesting tidbit was the belief that "trend chops off the left tail but also gives exposure to the right tail" which I took as being more about managed futures that equity momentum. What that means is that managed futures should protect against extreme negative events (the so called left tail) while benefitting from extreme positive events, the right tail. 

Basically Meb was saying that managed futures can get you out before there is crisis and continue to hold when a market, like gold or silver until a week ago, is rocketing higher. This left tail/right tail idea can be true at times but it has also failed plenty of times. If gold peaked a week and half ago and is now going to revert to some sort of mean that would presumably be much lower from the $5600 peak then I would expect most managed futures to ride gold back down if some sort mean reversion happened quickly. Most managed futures programs have slower signals, 10 month moving average is a common one for example. I'm not trying to predict a fast decline for gold, just pointing out that if it happens, managed futures is unlikely to have gotten out. Maybe some sort of risk weighting and/or position sizing process would be a differentiator of returns across different funds though, in a large gold drawdown.  

If you lean toward Meb's belief of tiling higher to managed futures, I would suggest owning several different funds. An easy way to differentiate would be to have one fund implementing a full managed futures program and one fund that was a replicator. I plugged KMLM, DBMF and AQMIX into Grok and asked how they differentiate risk weighting and position sizing. KMLM replicates using 22 markets while DBMF replicates using 10 markets. Grok actually had a lot to say about the differences between the three so this is doable if, again, you want a large allocation to trend. 

There was a quick mention in the podcast about one fund portfolios. We've looked at this idea before so I was curious to hear Meb's thoughts but they didn't really explore it with specific funds. It is intellectually appealing to have just one fund truly be all-weather giving a real return (inflation plus X%) of more than 2% while being robust in the face of market turmoil. 

One way to think about what would be ideal is to net out a result that exceeded the inflation rate plus a 4% or so withdrawal rate. That's not really about beating the stock market or even keeping up with it. Yes, some sort of diversified equity fund like domestic ITOT or global ACWI should annualize out above the inflation plus withdrawal hurdle but equities won't be robust in the face of market turmoil. They would be market turmoil.

A few weeks ago I asked Copilot and Claude to each construct a portfolio comprised of SPMO, GLD, AQMIX, ARBIX, CEFS and SHRIX that equalweighted the funds by standard deviation and kurtosis.  I got the following result.

The backtest looked pretty good. Since then we had the panic down in gold but the results still look good YTD despite the larger decline....because of the gold directly but also in AQMIX. Make of that what you will.

I circled back to this based on the idea of a one fund portfolio. Is there one fund that might best capture the attributes of the portfolio that equalweights standard deviation and kurtosis. The portfolio is pretty robust so maybe there is a single mutual fund or ETF. 

Copilot's first answer was AQMIX. It offered some other funds too which matters in that Copilot didn't feel constrained to just the components of the portfolio. The other suggestions were client/personal holding BLNDX and AQRIX which is essentially risk parity. Based on thinking it knows me, it thought that BLNDX would be the best choice I could make. 

That's funny on several levels including that at one point I said BLNDX is probably the closest to a single fund portfolio I'd ever go. Keep in mind, Copilot might have read the post in which I said that.

Inflation compounded at 3.88% in the period studied. I threw in TRTY guessing that it would be Meb's contribution to the one fund portfolio discussion. Yes it is only six years going to BLNDX' inception but in that period, Copilot's portfolio (my names, its weightings), AQMIX, BLNDX and VBAIX all cleared the 7.88% hurdle (inflation plus a 4% withdrawal rate). 

As a single fund portfolio, BLNDX clearing the hurdle by 264 basis points compounded, with a lower volatility is impressive. 

To the other point about chopping off the left tail while maintaining the opportunity to get the right tail, a lot of images coming.

First Copilot's monthly bell curve

AQMIX

BLNDX

I'm not sure I would pound the table on chopping off the left tail but there is something to it. I think Copilot does chop off the left tail pretty well but based on the monthly distribution, it seems to also chop off the right tail which is corroborated by the volatility numbers and the standard deviation numbers which although not shown are about half that of the others. 

I feel no push to ever consider a one fund portfolio but teasing out some all weather attributes is productive. BLNDX should be all weather to some extent versus a technology fund or some other volatile equity sector fund. Understanding what various holdings should be doing and how close they are to trading inline with those expectations is pretty high on my list. 

A final point is with any sort of portfolio strategy, there will be years where whatever you are doing will lag, maybe by a lot. BLNDX lagged VBAIX by 600 basis points in 2025 and almost 1200 basis points in 2023. 

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.

Deconstructing Autocallables

Earlier this week, I spent some time trying to dig in more to autocallable ETFs with the help of Copilot. The basic idea is that autocallables have been around for a while as structured notes, an investment product, that tend to have high yields and last year, they started to become available via the ETF wrapper thus democratizing the product. 

We've looked a few times at the Calamos US Equity Autocallable Income ETF (CAIE). The very basic idea is that it pays 14% annually (it's a monthly pay) so long as the reference index does not decline 40%. If the decline is that big then payments are suspended until the underlying index recovers back above point where it breached 40% down. I remember from the presentation when CAIE first listed that there was only one instance where the index went down such that payments would have been suspended. 

CAIE owns 52 autocallables with one coming due and getting replaced in the fund every week which can reduce volatility some. 

It's not even a year yet but you can decide for yourself what you think about it. My hang up has been that I don't think I really understand the risk here. A 14% yield in a 4% world has risk. It's not that no one should take the risk but I don't believe in taking risks that I don't understand. I may have made progress with Copilot. It was kind of a long back and forth but it was productive and hopefully I can convey what I think I've learned. 

I'll include tables from Copilot but the TLDR is that although they continue to pay out as long as there is not a 40% decline, the price will be sensitive to price swings in the reference index which is a derivative of the S&P 500. 

This next one makes them seem very complex.

The prompt for me to do this was that GraniteShares launched autocallable ETFs for two stocks, one tracking Tesla with symbol TLV and the other tracking Nvidia with symbol ANV. I made the obvious observation awhile ago that this sort of thing would be coming and that it is something we should try to learn about. 

Copilot said the "structural mechanics" of TLV and ANV were the same as CAIE other than using individual names for the reference securities. It said the yield on TLV and ANV wouldn't be higher than CAIE. I pushed back on that because by definition there is more risk in a stock than an index so the compensation for the autocallable tracking stocks should more. 

First it agreed that you'd expect higher yields but...

What it really meant was that the yield will be a little higher with TLA and ANV but not enough to compensate for the volatility and risk of the underlyings.

Copilot thinks that TLA and ANV will "carry 2-4x the risk of CAIE but only offer 1.2x the yield of CAIE."

Hoo boy. So I asked if the GraniteShares concept would make more sense with less volatile names like maybe Microsoft and Alphabet. 

Using lower‑volatility stocks like Microsoft or Alphabet would make the GraniteShares autocallable concept materially better — but not for the reason most people assume.
It’s not just “lower vol = safer.”
It’s that autocallables behave non‑linearly with volatility, and MSFT/GOOGL sit in the sweet spot where the structure actually works as intended.

That's really quite an indictment of TLA and ANV. It goes on to say "bad tradeoff" describing TLA and ANV. Using MSFT and GOOG has volatility characteristics that would make the autocallable behave more like it's supposed to behave, it said. 

Alright, I guess Copilot is not a fan. We're going with the idea that Copilot is correct.

While I still am not so intrigued that I want to step into CAIE, knowing there is downside sensitivity helps me understand a little better. I am not saying Calamos said there would be no downside but I don't recall it being discussed.

The reality is that CAIE will "work" the vast majority of time but not feeling like you fully understand what can go wrong makes it a difficult hold even if we understand a little more than we did before. 

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.

Looking Around Corners

This morning's email from Bespoke led off with the following quote from author William S. Burroughs.

“The best way to keep something bad from happening is to see it ahead of time... and you can't see it if you refuse to face the possibility.”

It ties in with a lot of what we talk about here not just for portfolio management but also lifestyle. 

First, portfolio management. I talked about "looking around the corner" for trouble or problems. A simple example is that with tech's weighting in the S&P 500 being so high at 45% (that's actually tech 34%, communications 11%), realizing that history has not been kind to sectors that grow larger than 30% of the index, being underweight tech and/or communications however you think about those two is a way to minimize the impact of something bad happening to the index. 

I'm not saying no tech exposure, that doesn't make sense, but if the software stock panic of this week turns out to be a canary in the tech coal mine, then being underweight should probably spare the portfolio some number of basis points of the full decline of the broad market if that's what happens. 

Try to look around a corner accounts for our perpetual exploration of how to use liquid alternatives to try to smooth out the ride which takes us to a webcast put on by WisdomTree with Shana Sissel from Banrion as the guest. Shana is working with WisdomTree to build model portfolios that rely heavily on alts as well as capital efficiency (leverage) using WisdomTree's core efficient funds like NTSX which leverages up such that a 67% allocation to that fund equals 100% allocated to a 60/40 balanced fund like VBAIX from Vanguard. Brad Krom from WisdomTree who was also on the webcast said that if the leftover 33% can go into something that earns more than T-bills, that you'd be adding alpha versus VBAIX which is a point we've looked at here before. 

The Banrion/WisdomTree portfolio is available at the WisdomTree website if you register. It's probably not ok to share all the names and percentages but we can keep it high level. It allocates 42% to "allocation" which includes NTSX and another core efficient (leveraged) fund, 17% to alts including client/personal holding BTAL, long/short (Shana is big on long/short), crypto, managed futures, a little bit to emerging markets, 10% to simpler fixed income beyond the fixed income exposure in the core efficient funds and the rest in simpler equities but included in that equity sleeve is a little gold from GDE. 

The backtest is short because some of the funds are pretty new but that's ok, Shana didn't start working with WisdomTree since last August or September (I think, apologies if it was more recent than that). Also, the portfolio is not static. She talked about dialing up or dialing down exposures but there was no indication of how frequently she does that.

Here's how I replicated it, it's about half the funds but it admittedly is a loose replication. For one thing, she included long biased long/short but I did not.

Everything there except AQMIX and SHRIX are in my ownership universe.

I wouldn't take too much from the raw performance for being such a short time frame but I think you can get a sense of the volatility added by the crypto and gold as both have gone down a lot in the last few days. 

The gold exposure is nowhere close to the 20-25% that some pundits argue for, it is much closer to the low-single digit starting point I use. It's not like she has a ton in crypto but it's not nothing and I am not a fan of Bitcoin or the others as a diversifier, to me it is all about asymmetric opportunity. Based on how volatile it used to be (the current event maybe approaches that?) and then the compressed volatility of the last few years, I don't believe it can be modeled in as a diversifier. 

Shana said something that is almost word for word what I have said here. She said that BTAL and managed futures are the two most important holdings because of the diversification they provide. I'm not claiming she got that from me, I am saying it is two different people drawing what I think is an obvious conclusion. BTAL and managed futures are the two most important diversifiers. Of course the 77% of the time that markets are going up makes them tough to hold but, also echoing our conversation, since there is no way to know when BTAL and managed futures will go up, you need to size it correctly and hold on. In this current event, BTAL seems to be working the best. The alts that should be going sideways are doing that which is good but gold obviously is part of whatever is going on and managed futures is very long gold and silver so it is getting hit too.

She has a little more BTAL than me and a little less managed futures. 

Back to the quote at the top of the post as relates to lifestyle. We learn as children that it is important to exercise and not eat too much sugar. That advice is more important than we realized when we first heard it. Just as owning 40% in tech is teeing up for an adverse outcome, so too is no exercise and a sugary diet teeing up sickness. Getting exercise and diet in order is a very simple way to keep something bad physically from happening. Really it is about improving your odds of successful health outcomes. 

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.