Month: May 2018

The Best of the Aleph Blog, Part 35

The Best of the Aleph Blog, Part 35

Photo Credit: Renaud Camus

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In my view, these were my best posts written between August 2015 and October 2015:

Learning from the Past, Part 6 [Hopefully Final, But It Won?t Be?]

The currently final episode on my investing errors, covering the last eight years.? Note that Valero has made me five times on my initial investment, though, and I still own it now.? This piece has more of the bright side of what I learned.

Musings on the Wealth Effect

“None of the ways I mentioned for getting more money for spending out of investments is likely to produce a lot of additional spending in aggregate across the economy. ?As a result, I think that the Executive Branch, the Congress, and the Federal Reserve should be cautious of trying to make asset values rise, or encourage more borrowing against assets. ?It will likely not have any significant effect to grow the economy over the intermediate -to-long term.”

The Surprise Dividend

A hypothetical piece for a company that wants to pay its shareholders more, but wants to do it in a more tax-efficient way.

Thinking About Pensions, Part 1

Thinking About Pensions, Part 2

This is a very realistic look at the issues surrounding retirement, and how to fund it.? it is very frank, and accurate in terms of what is possible.

Quarterly Financial Reporting is Needed, Productive, and Good

Why Companies SHOULD Offer Earnings Guidance

Quarterly earnings reporting is necessary for proper oversight.? If we did not have earnings guidance, a cottage industry would grow up to give it because investors want to know whether companies are performing adequately or not.

The Importance of Your Time Horizon

This is one of the most important concepts in financial planning.? When will you need the assets to provide spending money?

Buying The Next Hot Idea

This is an idea that rarely works.? Why do people fool themselves and chase fads?

When to Deploy Capital

A full answer to the question, “When do I invest cash balances?”? Hint: a middling solution is usually best.? Don’t be too bold or too timid.

When to Double Down

This is a tough question, but I give a clear answer:

Now, since I set up the eight rules, I have doubled down maybe 5-6 times over the last 15 years. ?In other words, I haven?t done it often. ?I?turn a single-weight stock into a double-weight stock if I know:

  • The position is utterly safe, it can?t go broke
  • The valuation is stupid cheap
  • I have a distinct edge in understanding the company, and after significant review I conclude that I can?t lose

Plan and Act, Don?t React

In general, the best investing anticipates likely changes.? By the time a change is revealed, it is too late to make investment decisions.

Too Many Vultures, Too Little Carrion, Redux

I suggested at the time that there were too many investors buying distressed energy assets, many of which went broke.

The Incredible Chain of Lending

Why to be careful when the financial sector grows too large.

A Bigger Brick in the Wall of Worries

I suggest that nonfinancial corporates may be the next financial crisis.? This is looking more likely now.

Volume Is Usually Low At Turning Points

This is a less-known truth: you can’t catch the bottom or the top, particularly if you have a large portfolio to manage.

Modeling Financial Liquidity and Solvency

Why most bank cash flow testing stinks, and how to improve it.

Don?t Worry About Public Bond Market Illiquidity

Bonds are illiquid, aside from the cash that they regularly throw off.? That’s normal; get used to it.

How Much is that Asset in the Window?

How Much is that Asset in the Window? (II)

A theoretical discussion about what assets are worth, settling on the unhappy idea that it is utterly relative, and that changing macroeconomic situations can affect things markedly.

At Least Build A Small Buffer

Having a small cash hoard is better than no cash hoard

Commissions Matter

I disembowel the idea that it doesn’t matter how large the salesman’s commission is.

Long-term Relationships and Credit Scores

An interesting piece on marriage, and how to make things work out, even when there are economic disagreements.

One Dozen Thoughts on Dealing with Risk in Investing for Retirement

“The basic idea of retirement investing is how to convert present excess income into a robust income stream in retirement. ?Managing a pile of assets for income to live off of is a challenge, and one that most people?are not geared up for, because poor planning and emotional decisions lead to subpar results.”

The Best of the Aleph Blog, Part 34

The Best of the Aleph Blog, Part 34

Photo Credit: Renaud Camus

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In my view, these were my best posts written between May 2015 and July 2015:

Learning from the Past, Part 5b [Institutional Stock Version]

Learning from the Past, Part 5c [Institutional Stock Version]

How I did a bad job for Hovde on Scottish Re and National Atlantic Holdings.? Also, what I did to mitigate the errors.? (And I am supposed to be really good with insurance companies…)

The SEC Pursues a Fool?s Errand

On why the Consolidated Audit Trial [CAT] is a bad idea.? Preventing “flash crashes” is not a desirable goal; they teach people not to use market orders, and to be careful.? The market is a place for big guys, not little guys.

On Partnership Investing

What do you have to be careful about if you are entering into a partnership?

On Risk-Based Liquidity and Systemic Risk

On how the Federal Government is making a mess of post-crisis policy.? The best policies would be:

  • Regulate banks, money market funds and other depositary financials tightly.
  • Don?t let them invest in one another.
  • Make sure that they have more than enough liquid assets to meet any conceivable liquidity withdrawal scenario.
  • Regulate repurchase markets tightly.
  • Raise the amount of money that has to be deposited for margin agreements, until those are no longer a threat.
  • Perhaps break up banks by ending interstate branching. ?State regulation is good regulation.

Advice to a Friend on a Concentrated Private Stock Position from His Employer

How to analyze a large position in your employer’s stock.? Lots of potential for gain and loss because of the lack of diversification in one stock.

There?s a Reason for Risk Premiums

Some academic literature implicitly treats risk premiums as “free money” if you hold it long enough.? But there’s the problem: can you hold it long enough?? Also, sometimes the extra returns are so small that they are not worth the risk.

On Bond Market Illiquidity (and more)

On Bond Market Illiquidity (and more) Redux

Some things aren’t meant to be highly liquid, and it is foolish to worry about the lack lack of liquidity.? The second article covered some good questions that I got asked, including bonds that are predominantly “bought and held,” and the limitations on investment banks to hold inventory post-crisis.

Yes, Build the Buffer

More reasons why you should keep a supply of cash on hand.

Coping With Zero

In this period, I couldn’t find any new stocks to buy.? What should I do?

Stocks or Bonds?

What do you recommend when stocks and bonds are likely to return the same amount over the next ten years?? I leaned toward the bonds, which so far has been the wrong call.

The Phases of an Investment Idea

Sixteen Implications of ?The Phases of an Investment Idea?

How to analyze the cycles that investment ideas go through.? People think about it linearly, which helps lead to the booms and busts.? The second article gives 16 practical applications of the idea to illustrate the general theory.

Avoid Indexed Life Insurance Products

Why indexed insurance products give subpar returns with reduced volatility, assuming the insurer stays solvent.

Asset-Liability Mismatches and Bubbles

In this article, I argue that China has been indirectly encouraging its banks to run huge risks by financing illiquid assets with liquid liabilities.? Again, the risk hasn’t materialized yet.

How To End Index Gaming

?…in this short post I would like to point out two ways to stop the gaming.

  1. Define your index to include all securities in the class (say, all US-based stocks with over $10 million in market cap), or
  2. Control your index so that additions and deletions are done at your leisure, and not in any predictable way.

Gundlach vs Morningstar

I discussed the unwillingness of Doubleline to cooperate with Morningstar to analyze certain Doubleline funds, and why it was reasonable in some ways for Doubleline to refuse, and Morningstar to not give favorable ratings.? That said, I concluded that Morningstar should apologize to Doubleline.? This article earned me polite calls from both sides, and one request to take the article down voluntarily.? I politely refused.

What is Liquidity? (Part VIII)

The occasional series that never ends.? Ten things that affect the liquidity of an asset, and explaining the Treasury “flash crash.”

It?s Difficult to Make Predictions, Especially About the Future

It is a fatal attraction, but if you are going to write about investing, you will have to make some predictions about markets.? Just try to keep them from being too outlandish.

We Eat Dollar Weighted Returns ? VI

In which I analyze the Hussman Strategic Growth fund and the large negative difference between time-weighted and dollar-weighted returns.

Stock Valuations: Micro and Macro

Can valuation measures applied to individual companies be used to value the market as a whole?? Under what conditions, or, is there a better way?

The School of Money, First Grade

This was the first of what was going to be sixteen articles.? I was thinking of turning it into a book.? Things have been too busy for that.? This article is about figuring out what you want to do in life.

Pick a Valid Strategy, Stick With It

Many amateur investors give up on a strategy just as it is about to start succeeding, and choose a strategy that has performed well, only to watch it underperform.

Bid Out Your Personal Insurance Policies!

I give you at least five reasons why you should bid out your personal insurance policies every three years or so.? Underwriting rules and premiums change, and some companies take advantage of loyalty.

The Pips are Squeaking

The Pips are Squeaking

Photo Credit: sid=================

This should be a short post.? I just want to note the degree of stress that many emerging market countries are under.? The Fed raises rates, and something blows up.? That is often the class of debt that has grown the most in the bull phase of the cycle, or, the one that has financed with short-term debt.? This is the “volatility machine” that Michael Pettis wrote so well about.

The Brazilian stocks I own have been falling.? A little lower, and I will make them double-weight positions.? Five times earnings for utilities that cannot be done without?? Wave the shares in.

Look at Argentina, Indonesia, and Turkey.? Fundamentally misfinanced.? Maybe own assets there that have enduring demand.? I own IRSA [IRS].

Russia is fundamentally sound.? I own shares in RSXJ, which is not so connected to the energy sector.

Buy the emerging markets generally, avoiding those markets are fundamentally misfinanced.? Or wait, and buy later.? Emerging market selloffs are often sharp and significant.? I’m not sure what is the right way to do it, so you could buy half now, and wait.? If it rallies, be glad you got some cheap.? If it sells off more, buy the full position.

There are some good values now; they could get better later.? Buy a little and wait like my “do half” strategy says.? Don’t get greedy, look for decent gains over 3-5 years.

And now for something completely different:

https://www.youtube.com/watch?v=gLyoBCIBCW8?t=1343

I appeared on RT Boom/Bust two weeks ago, and offered my thoughts on Wells Fargo at the end of the show.? I think they still have more problems to be revealed.? That said, things aren’t getting worse, so this might be a good time to buy the shares of Wells Fargo.

Full disclosure: My clients and I own shares of IRS, SBS, ELP, BRF, and RSXJ

Thoughts on Bank Debt

Thoughts on Bank Debt

Photo Credit: Teemu008
Photo Credit: Teemu008

 

I have long said that until an asset class goes through a “failure cycle,” risk-based pricing will be weak toward the assets in question.? One asset class that has become popular of late is bank debt.? Bank debt is a loan to a corporation that typically has first priority to make claims on the company in bankruptcy, ahead of the bondholders, much less the preferred stockholders and the common equity.

Though it is called bank debt, often the loans are arranged by banks and allow others to lend alongside them.? This has become popular among closed-end funds and ETFs like BKLN.? What are the advantages?

  • In the past credit losses have been low, partially because of strong covenants and low availability.
  • The loans have floating rates, so if interest rates rise, you get paid more, assuming the company does not choke on higher interest rates.

Recently a friend wrote me, asking:

Hi David:

Hope everything is well.

Quick investment question, if you don’t mind.

Wanted to get your thoughts on the leveraged loan asset class. From my perspective, there are both positive and negative factors at play currently, e.g., higher interest rates (positive), weaker covenant packages (negative), among other things.

Would love to get your opinion.

He has a decent summary of the situation.? My view is similar to this analysis at Bloomberg.? Underwriters of the loans have become less choosy, and as such have allowed loans to be made with weak covenants.? As a result, more loans have been made,? increasing their size versus bonds at junk-rated corporations.

I can tell you one thing with certainty.? When the losses of this cycle come, it will be decidedly worse than the prior cycles that had light losses.? That is due to the weaker covenants and the increase in the proportion of financing coming from bank debt.? When the debt had more parties taking losses in front of them, their losses were lower.? Even without the change in the covenants, the larger relative size would lead to greater losses.

I summarize it this way: those throwing money into bank debt do so to earn money but not take interest rate risk.? In the process they absorb more credit risk than prior generations of bank debt investors took on.

I have often invested in bank debt in the past, but I am not doing so now.? I think the credit risk is a lot higher than before, and not worth taking the risk in order to get a floating rate for returns.? Instead, I have invested in short-term bond funds with high credit quality.? Less yield, but more security.

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