It is time for another update to my monthly personal finance journal. The stock market continued to rally strongly in August. While my portfolio did not keep up with the stock market, my balances continued (modestly) to increase.
This Month
As a reminder, I ended July at about $265,000. I made some pretty decent progress in August, ending the month at about $272,000. I (again) did not save a ton, due to seasonal things and some vacation spending. I saved about $2,000. My savings should kick back up a bit starting in September.
The rest of the increase in my balance was due to appreciation (and yield). It doesn’t seem like the return was very impressive compared with the stock market. I’m not going to make too fine a point of computing the portfolio return in these monthly posts, however, because I don’t have a high degree of certainty. I let a big portion of my spending/overdraft flow through one of my brokerage accounts, which is included in my portfolio. I should be able/willing to expend the effort to get a better bead on how I did overall around the end of the year.
CURRENT PORTFOLIO
It makes sense that I would underperform, however, given my allocations. In August, stocks continued to rise. As you can see in the chart below, the SPY was up over 6% and the QQQ’s were up almost 10% (!).
Foreign developed stocks again lagged the SPY by several percentage points. I am still “overweight” foreign stocks. See Media Pin of the Week – More GMO, Weekly Media Pin – Grantham on Graham, Best Foreign Value Factor ETFs, Resource Roundup: More CAPE, and Foreign Value Factor ETFs Update. This is nothing crazy; about a 30% overall allocation to foreign stocks (about 50% of my equity allocation).
Value stocks also trailed (represented above by VBR and RPV). I don’t really have much allocated to systematic value, in the style of these ETFs, right now but I do tend to look more in that “zip code” for my active investments.
Overall, I also have about 40% in t-bills or their equivalent. This is primarily due to the fact that in my 401(k), I allow myself to modify the asset allocations between stocks and bills based on valuations (within limited bands; basically from 50% to 100% long). Right now, I have the allocation to stocks closer to the 50% end of the spectrum.
TREND + VALUE ALLOCATION
In addition, I manage some of my portfolio based on a simplistic systematic, trend and value strategy. In essence, I apply one of the simple moving average signals (thanks to covid-19, everyone is very familiar with moving averages and how they are used to “smooth” lumpy data to try and discern the trend) and combine that with a valuation trigger/overlay.
The idea is to have some risk management in place when stocks are expensive and have negative time-series momentum/trend (for example, when stocks are down over the last 12 months).
The account is divided equally: ~33% each to the S&P 500 ($SPY), the Dow Jones Completion Index ($VXF), and foreign stocks (basically, $VXUS).
I have about 15% of my investments in this account/strategy, but I am maxing contributions to this account. So it should become a larger allocation over time, unless the relative performance stinks. The account is tax-deferred and there are no per transaction costs. I only make changes once a month in an effort to limit the number of “whipsaws”(when you sell and are forced to buy to get back into the equity exposure at a higher price/level).
I made a change back in June to go back “full long” after moving to t-bills with the U.S. allocations back in March. I took a whipsaw on that move out and back, so the account is down (2.75%) YTD.
This account/strategy continues to lose YTD versus my benchmark. The benchmark is a globally version of a 60-40 portfolio: 20% in foreign stocks, 40% in total U.S. market index and 40% in t-bills. That benchmark is up 5.09% YTD. SPY is now up 9.65% YTD (QQQ is up 39.23% YTD !!!). So this trend following account is losing both to a 60-40 benchmark and the SPY YTD.
Active Investing Journal
I only actively manage (I’m talking “stock picking” here) about 10% of my overall portfolio, but I really enjoy following the markets and companies. So, I am going to start adding a short “investing journal” section to these monthly updates. The goal is just to informally track my thinking for future reference/analysis. I will also pull together info I want to refer back to in this section.
First, I’ve still got about 25% of my fun fund in cash. I also have about 20% cash in my HSA. I am not really trying to make a “market timing” call here. The cash in both accounts are partially a result of “repositioning” them. I decided to stop making contributions to the account serving as my fun fund (to make it less likely that I screw up the tracking of my returns), so I wanted to sell down some of the positions in the account to better diversify within what is now a discrete portfolio that I’m going to be tracking. I’ve got my eye on a few new positions for the cash, but I am looking for somewhat lower valuations on a couple of these names.
Similarly, I am transitioning my HSA from a quantitative, quality + value factor strategy to be just another discretionary account. I’ve been nibbling at some REITs in this account (at lower prices). I will be looking to buy more. SLG, VNO, EQR, LAMR and EQC are among these. I wish I could find another good residential REIT where I trusted management (i.e., they have big skin in the game and are also rational, ethical, and sharp). Let me know if you know of any.
I am also now “looking at” Store capital based on a twitter conversation and some thoughts provoked by a conversation with @postmarket (great follow btw) and others on Twitter. Basically, the point elucidated for me by the exchange was that landlords have a call option/take a lot of the economics for smaller, and more location-centric businesses. It seems like $STOR might be a way to express that (and REITs are hated right now…which is how I do). I will probably post more about REITs at some point.
So far, I am a little on alert/sketched out by STOR management. The STOR CEO has this series of “Store University” lectures on YouTube. The first video is here. Red flag number one: he’s wearing a bow tie and round eyeglass frames. Second, he mentions his record of making money for shareholders like Warren Buffett within the first 30 seconds. I am, however, just starting to kick it around, and it might be good diversification as part of a general “cheap REITs bet.” [Edit: since I posted this, I found this interview where Store CEO, Chris Volk, discusses the BRK investment…I am more favorably impressed.]
Another company I’ve been mulling over recently is ICE. I already own a little ICE. It has sold off recently with (I think) the closing/dilution from their Ellie Mae and other mortgage finance acquisitions (getting sort of close to my cost basis).
ICE owns the NYSE and a bunch of other exchanges. They also sell the data obtained from operating these exchange operations. It’s a (great) marketplace business (and that ain’t by accident). They are making a push to “digitize” and automate aspects of the mortgage/mortgage securities business. I think I get that strategy.
I just read the most recent annual report and proxy last week (on vacation). I noted the absence of any return-based/indicia of rational capital allocation factors (ROIC, ROA, ROE) in the compensation formulae. I also don’t love that they use options for a big chunk of the compensation. (Actually listening to Buffett and Munger on the topic, I think cash-based compensation alone is the best course, but options are arguably worse/can create poorer incentives than other forms of actual stock grants).
Jeff Sprecher, the CEO of ICE, is a certified beast. I think I became really aware of him when he went public with his potential offer for EBAY. Sprecher started with a regional power exchange in California and ended up taking over the NYSE. He owns about 1.5% of the company. That ownership offsets some of the concern about the proxy, but to be honest, I thought/wish he owned more. Here’s a great interview with him that goes through his origin story on the Inside the ICE House (LOL @ that name) podcast. Credit to @Bluegrasscap on Twitter for sharing some additional excellent background on Sprecher.
In addition to the whole digitizing mortgage securities thing, ICE has other potential growth irons in the fire. They are also building out bond trading and related data businesses. In addition, NYSE has recently announced a “direct listings” offering. This seems to be an attempt at sort of answering some of the complaints from silicon valley about IPOs that “pop” and the costs of going public. I don’t empathize/follow the logic of a lot of those complaints by the way (I mean if you need the capital and you need the wirehouses to sell your stock to a bunch of their clients you’re gonna’ have to pay …if you don’t need the capital then yeah ok do the direct listing, but your VC who is complaining about the IPO isn’t working for charity either).
But this could develop into a nice business for NYSE. It’s gummed up with regulators currently, but I doubt that will last long. I really just put the direct offering initiative on the board as “these people are smart and making moves to grow their business.”
Sprecher also seems very cognizant of the quality businesses he has assembled in his commentary so I don’t think the risk that he will “diworsify” the business just to grow his empire and get another helicopter is too acute. He already moved most of the HQ ops to Atlanta versus a higher profile/flashier city.
Morningstar and some other analysts take the position that the NYSE is not a moaty business (now) because of all the electronic exchanges and the way modern equity trading is done. Yet, I read investment pitches all the time for small or foreign companies where listing on NYSE is a (believable) catalyst to increase valuation. There is also some academic research out there indicating that companies listed on more prestigious/liquid/high trust exchanges might be more highly valued. The ability to increase the value of a company with a few strokes of the pen sounds a lot like a moat to me.
The big risk to exchanges, in my lightly informed opinion, seems to be increased “digitization” of assets. Like, not just the off exchange trading between computers, but what about the “tokenization” and distributed-ledger stuff?
In theory, you don’t need the exchange clearing/trust function if you are completing/writing transactions to a self-authenticating blockchain. I think, however, this risk seems kind of remote right now. After all, it seems like people still want a Coin Base (or someone) there to convert in and out of the tokens and fiat. (Oh yeah, ICE has also launched some digital asset futures contracts, so they got that going for them). You also probably just want someone there you can contact, complain to regulators about, and/or sue if you are hacked or otherwise when you are dealing with money or valuable assets.
So basically, I think it is perhaps more likely these guys are able to employ/co-opt the distributed-ledger technology to improve their business as they are to be displaced by it. It’s not like I’m going to pay for that potential, but I also don’t think the market should price in a big discount based on the disruption potential.
By the by, I also think this disruption analysis might also apply to banks. Rather than being displaced/destroyed by new financial technology it seems just as likely the start using the technology and end up with a better business. This seems to have happened with the railroad, the vacuum tube, the calculator, moveable type, the computer, the internet, online bill pay, the atm networks, etc…
Can you imagine how pumped up the investors in the diner’s club and/or early independent atm networks were back when they were new? I personally observed all the enthusiasm about internet banks back in the 90s and yeah the technology was good/useful; which is why Chase, BAC, Citi and WFC adopted it to improve their businesses, just like they are now doing with Zelle (and will probably do with distributed ledger).
I mean if I can reduce my branch network and related costs by uh 90%, all else being equal, won’t my returns on tangible capital employed explode up? Anyhow, I am in the process of building out a big (percentage) position in big banks (scale/capability for the tech spend) in my fun fund; so I’m sure we can talk more about this later. I get that the macro may make this a tough bet for a while, but I definitely have to ignore that as unknowable.
On another similar note, I just recently read the IAC press release and letter concerning a $1 billion investment that IAC made in $MGM (with a portion of the Match proceeds). I’ve followed and admired Barry Diller for quite some time, but I’ve never actually invested in any of his companies/backed his play with my money to my recollection. I do have a tiny position in Expedia, but that’s just so I get annual reports/pay a little attention. I should do a post about him sometime, but he’s a great investor/operator and allocator of capital in my estimation. Go on YouTube and search for some of his interviews, if you are interested (he gives great interviews/quote).
The point of mentioning the IAC letter is that I think I understand their stated MGM thesis. I am therefore looking at MGM now. I follow their logic of the established, scale, strong brand, player having the potential to really improve the existing business by deploying new technology (online gambling/gaming) to benefit from a brand new market. It looks like IAC invested the $1 billion below $19 per share, so the stock has increased materially since the announcement. I’m not trying to buy into that apparent enthusiasm, so maybe I’ve got a bit of time to get comfy with the bidness.
Helpfully, IAC used $DIS as a touchstone for the path to the MGM thesis. Basically, DIS has these superior assets in place and with the new market that has been proven out/created by technology and other potential market entrants, these companies may have a chance to grasp some real new opportunity. DIS is in a stronger position because they can enjoy some scale and other synergies with their existing businesses that should make them a formidable competitor in this newly proven out market. They believe the scale and the loyalty program, brand, and omnichannel potential will make MGM similarly advantages in the new online gaming (and sports betting) market.
IAC now has two spots on the board of MGM. Keith Meister (Corvex, formerly of Carl Icahn’s shop) is also on the board (I think Meister maybe has two spots total as well). Meister has installed a former Icahn-linked operator as CEO. So, there’s a lot to like here in my opinion.
I just have to get comfortable with the businesses historical performance (I assume dominant, branded casinos are a pretty good, though cyclical, business but I’ve got to do some reading). I’m going to want a good price, since they’ve just had to blow out the balance sheet due to the business impacts from covid (which could linger/ramp back up again).
I guess it is obvious from the above, that I’m also interested in DIS (you could also maybe expand this thesis/analysis to some of the other scale “legacy” media players…most of the t.v. broadcast networks/media empires were offshoots of their radio forebears). If and when I get a real DIS position in place, I will write about it (I’m not planning to pay premium prices while a big chunk of the business is basically closed down for who knows how long).
Well this section is getting long, so I’m going to wrap it up. But before I forget about it, I have been thinking about putting together a list of companies (maybe 10?) that I would own if “price were no object.” I think maybe this would force me to sort of upgrade the sights for my potential investments. It could also yield a sort of “shopping list” for the next time markets are weak. Let’s put a pin in that.
GOALS!
With the new year/decade, I established some goals for 2020. I have been tracking them in my monthly journal posts to try and prod myself along.
I am still on pace with my $50K in annual savings/contributions to investments. My body composition goal is status quo…
As for the goal of reading 12 books, YTD I have finished:
When Genius Failed, Concentrated Investing, Factfulness, the Rebel Allocator, Walden, and The Automatic Millionaire Homeowner by David Bach.
I am ALMOST finished with Towers of Debt. I am going to go ahead and share my impressions while the book is fresh in my mind. If you are interested in real estate investors or “corporate battles” and investing (or if you just don’t know much about Canadian business history and are curious), I recommend that you check out this book.
It takes a while to get going (as do a lot of these business/corporate sagas) but be patient with it. The book is about the Reichmann family who became billionaires through their Olympia and York real estate development business. As for the real estate, pretty much all you need to know is these guys started with a tile shop in Canada and eventually developed the world financial center in NYC and Canary Wharf in London!
On the way up they also took over Abitibi (a big paper/forest products company), Gulf Canada (oil and gas), and Hiram Walker (conglomerate with a core of liquor/distilling operations). They got into some pretty good corporate maneuvers and corporate intrigue/litigation with some proxy battles with the Hiram Walker deal.
I haven’t reached the end yet (or googled ahead), but the author is foreshadowing that they are going to blow up because they are using short-term financing to hold their long-duration assets and they are running super-high leverage (I mean the title kind of gives that part away).
I have also noted how clubby and protectionist Canadian business and politics are portrayed in this book. I have had some experience with that in my “day job,” dealing with some international taxation issues involving large Canadian entities and the CRA. I am also somewhat familiar with the protections/favored status of the Canadian banks. So I was not totally surprised, but it really factors into the story in this book as well. Perhaps I am being naive about the U.S. system, but it seems like this could explain some differences in the two economies/systems.
ONWARD
So anyways, that’s that. On the personal finance front, I saved a little and the market appreciated more. I seem to have a lot of “interesting” stocks popping on to my radar screen, but I am probably sitting on too much cash in my active accounts. My systematic asset allocation accounts are losing to the stonk indexes YTD, but I am feeling pretty good about the behavioral benefits and my ability to stick with them long term. I hope you are all getting on tolerably well in the age of covid and are able to enjoy some outdoor time this summer. Thanks for reading!