When I began this blog, I would do a post every 100 posts that pertained to the blog itself, my readers and me.? I did not do a “Post 900” for a number of reasons.? This post is meant to make up for it.? For those that echo my blog, like Seeking Alpha, I ask that you republish this, because I need it this time.
I love writing, but that is not what I do best.? My best talents are managing equity assets.? I have a pitch book that explains my methods, and how I have beaten the S&P 500 since September of 2000.? My problem is this: if you don’t have an institutional investor, institutional investors won’t invest with you.? So, if you have influence over an institutional investor, ask them whether they would be willing to consider me, and I will send them my pitchbook, updated to the end of April 2009.
Again, thanks to all my readers.? Your time is limited, so appreciate that you consider me.? If I gain an institutional investor, oddly, that will free me to write more.
Whew, I’m glad that one is done.? Thanks to the nice ladies at AIG who sent me the Statutory books.? My apologies for any difficulties with the HTML formatting.? For those that would like to read it in PDF form, here it is.? For those that would like to play around with the data that I extracted into Excel, here that is.
Comments are welcome.
I’m planning on resuming a more normal writing schedule.? The AIG work took a lot out of me.? Future projects include finishing off the Trend Following book review, the John Davidson series, and one article where I ask my readers for a bit of help.? Till then, stay well.
I’m going to complete this article the way the first article began, incorporating the full text, and then interact with my friends, the boxes.
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Box 1: Uh, pardon for the interruption, but we?re going to blog for David while he works on a research piece for Finacorp.
Box 2: Tireless, isn?t he?
1: I wouldn?t know, and neither would you.? We?ve only been here 14 hours.
2: True.? The UPS guy was a hoot when he brought the boxes: ?These are heavy, what are they??
1: Yes, but David had no idea what was going on either.? The expression on his face was priceless as he said, ?Uh, not sure.?? Then he took me inside.
2: And then walked out to get me, and he put me on top of you.? Then he scanned the writing on me, and seemed not to find much? then he roared with laughter.
1: Yeh, I heard him say to his wife, ?I NEVER thought they would send it.?
2: His wife gave him the usual polite expression of ?That?s nice dear,? as she went back to homeschooling one of the kids.
1: Precious, huh?? 22 years of marriage is comfortable like an old shoe.
2: Well, he opened me, and looked at some of the documents inside.? He even commented to one of his kids on the two colors on the documents inside me ? blue and yellow.? Perhaps we?re from Sweden, or maybe Ikea.
1: Hmph.? Well, the sender was once worth a lot more than that pipsqueak Ikea, but sadly, is worth a lot less now.
2: Is the sender worth less than ABBA?
1: At this point yes to that as well.
2: Too sad.? Hey, when David opened one of the documents in me, he commented, ?Hey, I know that guy.?? Then as he looked further, he commented on some financial data with words I can?t even remember now.? Very obscure.
1: He seems to be able to understand what is in us.
2: Yes, but there is a lot here.? I thought I heard him say, ?They could have put this on a DVD, couldn?t they??
1: I can?t answer that.? I?m related to a bunch of dead trees, and so are you.
2: I resemble that remark.? Wait, resent.? Hey, I am not paper, I am information!
1: You wish.? In all of our bulkiness, finding the important stuff is like finding a needle in a haystack.
2: Maybe David can do it?? He did comment that there was a story here after looking at one document.
1: Maybe.? A company created us, a statute created us, a phone call to investor relations created us.? I have no idea how talented David is, but I am rooting for him.
2: Me too.? Now to all our readers, we have given you enough clues that you might be able to identify the sender, and guess what we are.? What are we?
The Boxes
David: Time for me to take over this discussion.
1: Go ahead.
2: You’re the boss.
D: I’m not the boss. It all started when my boss asked me about some AIG bonds, and I told him that a true analysis would be impossible without looking at the regulatory (statutory) books.? He told me to do my best without it, and give my best estimate, so I did.? But then, on a whim, I decided to call AIG Investor Relations, and ask for the statutory books for every US-domiciled insurance subsidiary of AIG.
1: Bold!
2: Wow!
D: Uh, I’m not sure, but you never get anything unless you try.? I put my odds at lower than 25%.? That said, after two days the AIG IR rep found the right person, who called me back and said that maybe I would get the documents.? I wasn’t holding my breath, though, because I had done the same thing at other insurers on a much smaller scale.? It’s expensive.
2: I knew we were important!
1: How expensive?
D: Well, they sent me around 60 books altogether, and preparation and printing take some doing — the shipping isn’t cheap either.? I estimate it cost $2000 for the whole thing.? I was shocked when I received it.? (For readers, as you look at the picture above, the yellow books on the left are P&C subsidiaries that were too small to deal with.? On top of them are variable account statements for life companies — little solvency risk there, so also ignored.? Hidden behind the blue and green upright books are the blue books for the life subsidiaries.? I have taken data from all of them.? The yellow books immediately next to me were bigger P&C insurers from which I took data.)
1: So, what are you going to do now?
2: Aside from pose with us?
D: I have excerpted data from around 45 subsidiaries, with 20+ pieces of data from each.? My 48-year old eyes felt the strain as I did so.? After I did that, I realized that I left out a two critical variables, and so I am going back to get that data.? After I do that, I will publish a research piece for my employer, and two days later I will post it here.? There are several issues:
Continuing profitability
The bailout
Realized and unrealized capital losses (including the infamous securities lending program)
Reinsurance
Capital Stacking
Dodgy assets
Is this strictly an investment problem?
I’m not done with my analysis yet, but there is a good story to tell here.? Were all of the problems with AIG Financial Products, or were they more evenly distributed across the company?? My current guess is the latter, but I am really not sure yet.
Gentleboxes, some praise for the good guesses have received?
April 4th, 20093:31 pm at EditRequested Freedom of Information Act documents on AIG, for sure, and perhaps Fannie and Freddie as well.
D: Well done both of you.? You caught the AIG strand in what the boxes were saying.? What firm would I know people in that could deliver a ton of data to me?? AIG.
Boxes?? Any final comments?
1: I am happy for your efforts, but I feel empty.
2: Me too.
D: Well, you are empty now, so there is some reality therapy for you.? As for me, I have more research to do.? I hope to publish my work on Thursday, and publish at my blog late on Saturday.? Until then.
Box 1: Uh, pardon for the interruption, but we’re going to blog for David while he works on a research piece for Finacorp.
Box 2: Tireless, isn’t he?
1: I wouldn’t know, and neither would you.? We’ve only been here 14 hours.
2: True.? The UPS guy was a hoot when he brought the boxes: “These are heavy, what are they?”
1: Yes, but David had no idea what was going on either.? The expression on his face was priceless as he said, “Uh, not sure.”? Then he took me inside.
2: And then walked out to get me, and he put me on top of you.? Then he scanned the writing on me, and seemed not to find much… then he roared with laughter.
1: Yeh, I heard him say to his wife, “I NEVER thought they would send it.”
2: His wife gave him the usual polite expression of “That’s nice dear,” as she went back to homeschooling one of the kids.
1: Precious, huh?? 22 years of marriage is comfortable like an old shoe.
2: Well, he opened me, and looked at some of the documents inside.? He even commented to one of his kids on the two colors on the documents inside me — blue and yellow.? Perhaps we’re from Sweden, or maybe Ikea.
1: Hmph.? Well, the sender was once worth a lot more than that pipsqueak Ikea, but sadly, is worth a lot less now.
2: Is the sender worth less than ABBA?
1: At this point yes to that as well.
2: Too sad.? Hey, when David opened one of the documents in me, he commented, “Hey, I know that guy.”? Then as he looked further, he commented on some financial data with words I can’t even remember now.? Very obscure.
1: He seems to be able to understand what is in us.
2: Yes, but there is a lot here.? I thought I heard him say, “They could have put this on a DVD, couldn’t they?”
1: I can’t answer that.? I’m related to a bunch of dead trees, and so are you.
2: I resemble that remark.? Wait, resent.? Hey, I am not paper, I am information!
1: You wish.? In all of our bulkiness, finding the important stuff is like finding a needle in a haystack.
2: Maybe David can do it?? He did comment that there was a story here after looking at one document.
1: Maybe.? A company created us, a statute created us, a phone call to investor relations created us.? I have no idea how talented David is, but I am rooting for him.
2: Me too.? Now to all our readers, we have given you enough clues that you might be able to identify the sender, and guess what we are.? What are we? 😉
The demise of Bear, Lehman, AIG, Fannie, Freddie, and more.
The near-demise of Citi, Bank of America, and many other financials.
The US government floundering as it gropes for solutions.
The Federal Reserve tries all manner of novel schemes to support leverage, as they move into a ZIRP with Japan, and the rest of the world trailing.? Quantitative easing remains, if they have enough money to buy helicopter fuel.
The collapse of the international division of labor as exports dry up globally.
The grand round trip for commodities as the world could not maintain the frantic pace of growth that had been fueled by leverage and neomercantilism.
The start of trade wars, as nations look to protect their home markets.
The loss of faith in currencies, as gold continues to rise.
Risk assets get shellacked, whether public or private.
Pension plans, endowments, and other institutions suffer.? Governments realize that they were reliant on the overleveraged markets as well.
Residential real estate continues to fall in value, dragging mortgages and banks down with it.
Commercial real estate begins its long soft era.
My portfolio has beaten the broad market indexes for another year, though not as convincingly as in the past.
Those who have read me a long time know that my interests in investing are broad.? Being an economist, as well as a quantitative and qualitative investment analyst gives me more tools to work with.
But where am I going from here?? I am slowing down.? For two years, I have tried to keep up a? pace of two posts a day, six days a week.? Well, it has turned out to be more like nine posts per week, 75% of my goal.? As when I wrote for RealMoney, my own standards hindered my goal.? (At RealMoney, I wrote few articles near the end, because I did not feel that I had more to write that justified an article.)
I could put out a lot more posts, and quote other sources more broadly.? I would rather just link to them so that they get credit for their material, and then write more.? After all, if I am writing, I ought to put forth my opinion, not just quote someone else.
But blogging has crimped my ability to serve my firm, my family, and my church.? Much as I enjoy the interaction in the blogosphere, I am going to slow down my posting rate at The Aleph Blog.? My apologies to any who are saddened by this, but I hope to keep the quality of my posts high.? My posting rate is targeted at three times per week.
This is post #886 at The Aleph Blog.? Post #900 will have something more on this topic, together with ways that we can work together more profitably.
I close with thanks.? I am big on gratitude.? Thanks to those who read me; your time is valuable.? Thanks to those who comment; you sharpen me.? Thanks to those who link to me; I don’t deserve it.? Thanks to those I link to; you are doing great work (or lousy work, as the case may be).? To my family and church, thank you. Finally, thanks be to Jesus Christ. Woo-hoo! What a great year!?
When I was an actuary interacting with the investment department inside a life insurance company, one of the things that I learned early was that there was an inpenetrable jargon on the part of the bond investors that neophytes had to learn.? My boss, the best actuarial businessman that I have ever known, insisted that we have a weekly meeting with the investment department, and in their offices.? Being on their own turf made them freer to talk their own lingo, and that helped us learn it.
When I went to work in an investment department years later, the shoe was on the other foot.? I was still learning investment lingo, but when the actuaries showed up, I was there to translate.? Not surprisingly, there is jargon on both sides, often with the same term having two different names, because it is used two different ways.
It was true until the day I left the firm, where I heard a bond term I had never heard before.? We have a lot of jargon in investing, whether it is fixed income or equities.? There is additional jargon in insurance.
Here’s my offer: I try to define what I write about, but if I fail to define something adequately, let me know in the comments, and I will add an entry to the new Jargon page.? Let me know; I live to serve.
At the beginning of each calendar year, I sit down and see how my expenses have tracked over the past year.? I make a table and a pie chart to show my wife.? She is always amazed at how much goes to taxes, though the new amazement is what it takes to put children through college.? We spend some time discussing plans for the next year.? Since my wife is not money-oriented (not a big spender, and focused on teaching the children) this gives her a quick way to get reoriented in our financial situation.
After that, I look at investment income.? 2008 was an unusual year for me in this way: it was the first year in my working life that my net worth fell.? Though painful, at age 48, I’m grateful that I have had a good past.
I then look at how individual stocks in the portfolio did.? Here’s a chart for 2008:
The chart is in order from the biggest gain to the biggest loss.? XIRR is the internal rate of return on funds during 2008, and days was the number of days I held a position during 2008.? Needless to say, this was my worst year ever, but I still did better than the S&P 500 by a middling single digit percentage.
That is important to me, because in 2009 I hope to gain my first external client. I have been banging my head against the wall, because I have a small bunch of investors that want to sign on, but they all don’t want to be my first client.? They want to see an institutional investor invest in my fund, then they will invest with me.? Frustrating.
Since strategy inception in 2000, I have beaten the S&P every year except 2007, where I missed by less than a percent.? And, given the performance of many well known value managers in 2008, beating the S&P ain’t bad.
Going back to the table above, I got whacked on names with bad balance sheets, life insurers, and names with too much cyclicality.? I did well on a number of names that I bought cheaply, and particularly on my October reshaping, where I focused on survivability.
I still think survivability is the watchword here.? I’ll be putting out my candidates list for the next reshaping soon, as well as my main industry model, but in an environment like this, raw cheapness doesn’t matter; a company must survive to realize the discount on its valuation.? Remember, the main rule of value investing is not “buy them cheap,” is not “lowest average cost wins,” but is “margin of safety.”
One more note: the present portfolio “long only” portfolio is 22% cash.? That is the highest level in eight years.? I have raised cash into the recent rally through my normal rebalancing discipline.? I will deploy cash as I get opportunity into strong names with strong balance sheets.
Asset Allocation
I also look at our asset allocation.? Excluding our house (no mortgage), it looks like this:
30% Cash and TIPS
20% International Stocks
18% Large Cap US Stocks
17% Small Cap US Stocks
15% Private Equity
I have no debts, but I have eight liabilities, two of which are going to college, and six of which might do so.? That is my main financial challenge for the next fifteen years (the little one is almost seven, and what a cutie.)
Even though I am bearish, I am comfortable with the amount of risk that I am taking, partly because I may derive a business from it through my ability to pick stocks that do relatively well.? The private equity is illiquid, but in this environment even it is doing well — having clever businessmen as friends is a help.
Swap — Bought Japan Smaller Capitalization Fund, sold SPDR Russell Nomura Small Cap Japan? (The CEF was trading at an extreme discount)
Rebalancing Sales
Assurant (3)
RGA
Valero Energy
CRH
Magna Automotive
Safety Insurance
Charlotte Russe
Shoe Carnival
Devon Energy
Japan Smaller Capitalization Fund
Rebalancing Buys
Assurant (2)
Charlotte Russe (2)
Magna Automotive
Shoe Carnival
Nam Tai Electronics
I also participated in the RGA exchange, where I traded my A shares for B shares when the discount was wide, and received RGA shares one-for-one when the exchange was complete.
Blog News
I have several book reviews coming, including one on Technical Analysis, and one on how wealthy people got that way.? I also have a panoply of other article ideas:
How the lure of free money corrupts politicians
Setting up mutual banks
The risk of no significant change (not yes we can, but, why do we need to change?)
Hidden correlations
The mercantilists lost
Analyzing TIPS
Momentum strategies
Buybacks
Confidence means keeping assets inflated
How securitization could aid resolution of our current crisis
It is a lot of fun writing this weblog.? I enjoy it a lot.? As I close this note, I would like to thank:
Those that read the blog
Those that comment here, and send me email (all of which I read, but I can’t answer all of it)
Seeking Alpha
Others that republish me
Those that buy products at Amazon through my site
Those that buy blogads at my site
Other bloggers that give me good ideas
And the firm that employs me, Finacorp, but bears no liability for my mutterings here.
2009 may prove to be a better year than 2008.? If that is not true, we will be rivaling the Great Depression.? That said, there are opportunities even in bad economic environments, and lts see if we can’t make the best of what we do get.? Here is to making the most of our opportunities in 2009.? May the LORD bless us all in our endeavors.
Full disclosure: long COP SBS DIIB.PK MGA IBA XEC VLO TNP JSC NTE VSH SAFT CHIC SCVL HIG RGA HMC ESV KPPC DVN ALL PRE CRH PEP GPC LNT NUE AIZ (yes, that is the complete current portfolio)
This is short notice, and for me as well, but I will be on the Ron Smith Show on WBAL 1090, in the 3PM (eastern) hour today.? We will be talking about the bailouts, monetary policy, debt, etc.? If you aren’t in the Baltimore area, you can listen to it here over the Internet.
This is not a political blog. (Repeat?!)? Ugh.? I’m tired.? Between my work today for a potential new client that will really kick off my business, and appearing on the Ron Smith show, I am bushed.
I found the time in the WBAL studios interesting.? I get how radio works now, for a successful show like Ron Smith’s.? We had a lot of fun conversations during the breaks, and I went home with some reading assignments, of things I have not read, but Ron thinks are important.? As I said before, he is a bright guy.
I was happy to spend an extra hour with Ron.? They cancelled their planned 5-6PM hour in order to talk more about the current economic troubles.? I was happy to do so.? I may have sounded more doom-and-gloom than I normally do, but it reflects the current conditions, which are tough.? I tried to describe the difficulties that the short-term lending markets are in, but our economy and society is complex.? It is difficult to explain in soundbites, and Ron gave me more time than most radio hosts would.
I made it through the two hours without any major flubs, though I do know I was asked to define M1, M2 and M3, but I forget; I think I got interrupted, so I never defined all of them.
One thing about live radio and TV, it goes fast, and it is stream-of-consciousness.? You can’t catch up on past thing that were inadequately handled.? You can only hit what the present caller is talking about.? As a generalist, perhaps I did well, because none of the callers gave me a hard time.? Ron, of course, was a gentleman, and was a big help to a neophyte trying to do his best.
I look forward to the next time I am on Baltimore’s most popular radio show.? I did much better than I expected. 😀
I have long admired The Ron Smith Show, which I believe is the most listened-to radio show in Baltimore.? I will be on the show tomorrow starting at 4:05-15 Eastern Time.? You can find the live stream here (look top left).? I find this a real honor, because unlike most radio talk show hosts, Ron Smith is a genuinely bright guy, and doesn’t care about wider popularity.? Like me, he doesn’t care whether the broader society follows him or not.
