Stock Rover

Barron's Electronic Investor column reviewed a site called Stock Rover. The review was compelling enough that I checked it out and registered. The interface is more like a software program than a website interface that you might be familiar with from Yahoo Finance. Below are a couple of screen shots to give some sense of what it looks like.

So far I've looked at only a couple of things in there but it seems like there is going to be a lot of information as I get further into it. For now I have input our large portfolio into the site and looked at the charts. The portfolio portion does some interesting things along the lines of managing narrow aspects of the portfolio like the beta and the yield. It will give you dynamic yield and beta information. I've mentioned before the extent to which I manage these aspects of the portfolio.

In the lower left hand corner of the interface is a column titled views which goes into more detail than the default on various attributes including dividends, valuation, returns versus SPX among several others--these are clickable sorts that get applied to the portfolio. You can also input multiple portfolios.

The charting seems to have everything that any of the other websites have except for maybe Stockcharts.com. Stockcharts.com allows for comparing two things as a ratio such that IBM:INTC would express a comparison as a single line ratio versus the two line comparison that just about every other site has. If Stock Rover can do this it wasn't apparent as to how to do it.

While there is a lot of utility here there are some issues to be aware of. It appears to not know pinksheet foreign stocks. We own a couple in the portfolio and so what I was able to input for tracking isn't really our full portfolio. There was also some incorrect dividend information, mostly with NYSE listed foreigns where the yield was very much understated so the calculated yield of the portfolio was incorrect. Where there were mistakes with yields there very likely are mistakes elsewhere.

One area I did not see was whether or not it captures sector weightings in the portfolio the way Morningstar does. Stock Rover categories individual stocks with specific sectors but not so with narrow based ETFs. I could see where categorizing the PowerShares Water ETF (PHO) might be difficult to do but an ETF with the word utilities in it would seem to be easier to categorize but again it does not do that. I place a lot of importance on measuring sector weightings in the portfolio so hopefully this can become more robust. 

The first picture is the table at the top half of the default layout (minus the ticker symbols) and as you can see there is a lot of room to scroll horizontally to a lot more information. The picture of the chart gives a hint of the various menus to capture a lot of different types of charts.

In case anyone wonders, I am not being paid for this review; I've had no contact with the Stock Rover people. For now it is not quite there but it can still be very useful and I think some of things I've mentioned are doable as would a few other things which would be very democratizing in terms really understanding the current portfolio and what any new holding might do to the portfolio. For example, I input as much of the portfolio as I could. As an example only, I could then see what adding IBM would do to the yield, beta and market cap (the average market cap doesn't appear to yet be available but would be something I would suggest they add) of the portfolio which, from the top down, would make for a more informed decision.
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Sunday Morning Coffee

A reader left a comment on a post from earlier in the week that I think ties in with something that came up in my Thursday call with AdvisorShares. In his comment the reader noted that we've been in a bull market since the March 2009 low and that in his opinion the bull does not look long in the tooth.

In the AdvisorShares call I was asked about my outlook for the rest of the year and I felt as though giving a complete answer for 2012 included something of a look ahead to 2013. Although not new for long time readers, I mentioned that if 2012 finishes up a little (or better than up a little) that will be four years with out a decline (I think of 2011 as being flat). Historically the US equity market is down one year in four so in a way if we are up in 2012 then it could be argued that we would be overdue for a down year.

This is a top down concept based on how cycles have often worked in the past. There is of course no reason that 2013 can't be up and maybe there will be several more years in a row of positive returns but this is not how things have typically worked.

This sort of thing impacts portfolio decisions. There was a stretch in 2010 where the S&P 500 spent a couple of months below its 200 DMA. While I remained disciplined in terms of starting defensive action I was not aggressively defensive based on how cycles tend to work. Yes the market could have fallen off a cliff at that point but it seemed unlikely; it was too soon. I blogged about this at the time in the context of being more inclined to give the market the benefit of the doubt.

In late 2007/early 2008 I was more aggressive with defensive action because it had been several years since a meaningful decline, the yield curve was inverted and the 2% rule appeared to be kicking in. If things unfold in manner I am thinking for 2012 then I would be less inclined to give the market the benefit of the doubt in 2013, should there be a breach of the 200 DMA, and be a little more aggressive with defensive action.
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The Big Picture For the Week of April 29, 2012

I stumbled across a very important quote from Jeremy Grantham;

The cardinal rule is to not underperform in bear markets.

Confirmation bias being what it is I take this as a validation for some sort of objective trigger point for taking defensive action when chances for a large decline increase. Obviously at our firm we use the S&P 500 going below its 200 day moving average. There are several others that are similar like the 50 DMA crossing below the 200 DMA.

I don't think it matter too much which indicator is chosen as none of them can be the best for every market cycle. Our objective, as stated frequently, is simply to avoid the full brunt of a large decline. Top ticking the market might happen but that is less important than what Grantham states above.

While things are going well it is worth pointing out that markets are cyclical there will be another large decline at some and it will scare the hell out of people such that would have seemed to have forgotten the last one. Part of the concept of defensive action is the psychological benefit of reducing the odds of seeing the portfolio drop to a point that induces panic selling.

Every so often the market goes down a lot. And then it starts to work its way back. It might take years to get back to where it was or maybe not so long (Japan perhaps being the exception that proves the rule) and then it repeats. Sitting here today while things are looking pretty good, everyone would say oh, of course there will be a bear market again but then many of these same folks will become discombobulated when it happens. Don't let that happen to you or your portfolio.

This weekend is the Whiskey Row Off Road race which is a whole series of events that started last night with a criterium around downtown Prescott.
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Holding Stocks Long Term

Yesterday I did a conference call with AdvisorShares that covered a lot of ground including a reason or two to try to hold stocks (or funds) for the long term. In related news client holding Johnson & Johnson (JNJ) hiked its dividend for the 50th year in a row.

In yesterday's call there were questions about our performance and the context of a call like that allows for specific numbers (the blog does not because it makes a blog post an advertisement which needs approval) and so I made a couple of references to things we have held for years.

Although not mentioned on the call we owned JNJ as far back as when the portfolio's performance started being tracked in 2004. Since then JNJ has paid 31 dividends (I believe the clock on the portfolio starts in August 2004) totaling $13.57. On a price basis JNJ has trailed the S&P 500 by about 15 percentage points. The dividends add another 25 percentage points on to the JNJ result. After factoring in the the SPX yield it is probably close to a push. I would note that the same study done on December 31, 2011 would probably have JNJ noticeably ahead as the stock is flat this year versus an 11% gain for the market.

The stock has not been a huge winner but the yield clearly helps the total return and the relatively low volatility helps with smoothing out the ride.

Another example with a more noticeable difference is Statoil (STO) versus the Energy SPDR (XLE). We've owned STO for almost seven and half years. In that time it has outperformed XLE modestly, by about 6%. Since we've owned STO we have collected $9.74 in dividends which adds 68% to the return in that time. XLE has paid $5.51 in that same time which works out to adding 15% in returns. As a note, the $9.74 includes $1.21 which is being reported by dividend.com at the 2012 payout).

Finally an example where dividends are not the story (as a note I believe in trying to build an above market yield into the portfolio but I do not believe in any version of investing in only dividend payers). We've owned Nike (NKE) for about six years. Since June 30, 2006 Nike is up 162% versus a 12% gain for the S&P 500 (we shaved down the position along the way to rebalance but still own the name).

The point here is that over any six or 12 month time frame any of these stocks can and have lagged the broad market, their respective sector or both but over the many years that they have been held there has been some serious value added. It is important to be cognizant that any great story or long term track record can change but two of the names are clear and away household names that are easy to access and understand. I may have been a relatively early adopter on STO but as the largest company by far in what is probably the healthiest developed economy in the world it was not going to be a secret for very long.

In the past I've mentioned buying and hoping to hold forever. For now, the three above make that list. I've mentioned that Bank Of America (BAC) was on that list until they bought Merrill Lynch after the Lehman weekend. If your goal really is to simply have enough money when you need it then I think time frames noted above make this easier to achieve.
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Reminder:Scheduled To Appear

As a reminder I will be participating on the AdvisorShares Alpha Call talking about exchange traded funds, our firm's relationship with AdvisorShares and portfolio construction and management. The call starts when the market closes today and should last about 30 minutes.

Call in number 1 800 977 8002
If you're in Canada 1 404 920 6650
Access Code 777534#

I hope you can listen in.
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Wait, Maybe We Are Doomed

I don't actually believe we are doomed but there were some scary headlines related to Social Security this week and that it may run into serious funding issues a little sooner than previously expected. A succinct description that I read elsewhere said that paying the disability benefit will have to start coming from the general fund in 2016, earlier than expected, which creates a strain on the entire program earlier than expected.

There were of course also comments from Tim Geithner noting that in "2033, incoming revenues and trust fund resources will be insufficient to maintain payment of full benefits."

A recent post of mine on this subject that was re-run on Seeking Alpha drew 75-80 comments with some making the case that social security is fine and there were similar comments left here on the original post as well. Joseph Weisenthal from Business Insider appears to be one who believes all is well if I am reading this post correctly.

There was a heated discussion in the Seeking Alpha comments as to whether or not Social Security is or is not a welfare program, one very interesting comment noted that Social Security was created to improve the government's cash flow. I believe there is a kind of conspiracy theory floating around that social security is fine but that the government is trying to condition us into accepting reduced benefits as a means of ripping us off.

It is not so clear that Social Security is a welfare program now but the obvious path seems like that is what it will become. Benefits will not disappear but as a recurring theme, there will be means testing that will probably come down further into the middle class than many people think. Means testing won't stop at people who merely meet President Obama's definition of wealthy.

A couple of paragraphs up you will see mention of a heated discussion and a conspiracy theory. These sorts of things tend to be fueled by emotion. An emotional response is unlikely to be anyone's best resource for addressing how changes in Social Security will effect them.   

Political activism on this issue might be the good fight but will not solve any personal issues if Social Security as we know it today cannot be saved. People so motivated to take up this fight can probably be of more help once they have first addressed their own problems. For anyone new, the context of solve their own problems means live below your means, save more and figure a way to create a "post retirement" income by monetizing a hobby (or something similar).
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Scheduled To Appear

Please join the AdvisorShares team and a special guest this Thursday, April 26th at 4:00pm EDT for a 30-minute conversation. 

This upcoming Thursday's discussion, "Randomness to Your Benefit" will feature Roger Nusbaum, Chief Investment Officer of Your Source Financial.

Roger will provide market opinion and discuss his top down perspective, focusing on global asset allocation and individual security selection utilizing both long and short market exposure.

We will hold a live Question & Answer session with callers after Roger's presentation.

To start the audio portion of the Conference call:

• NEW Call-in toll-free number (US/Canada): 1-800-977-8002
• NEW Call-in toll number (US/Canada): 1-404-920-6650
• NEW Attendee access code: 777534#

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Message From The Yield Curve

Long time readers may recall that I worked briefly at Fisher Investments in 2002. My stint there was very helpful in terms of creating my own process--I also bring in quite a few other things in to the equation and leave others out but I learned a lot there.

One interesting nugget was something related to the yield curve. The extent to which the yield curve inverts is crucially important for reasons laid out many times over in the early days of this blog (lending relies on borrowing short and lending long).

Another aspect of the yield curve is the extent to which the slope of the curve factors into growth outperforming value or vice versa. The idea as believed at Fisher was that with a flatter curve, growth stocks to better and with a steeper curve value should outperform. They felt that the reason for this is that so called value companies often issue debt to access capital markets and the debt, specifically longer term debt, is more attractive when the yield curve is steeper. This makes the bond sale successful and gives the value company access to the capital.

Growth companies tend to access capital markets with secondary stock offerings. When bond sales are unattractive then equity sales become relatively more attractive giving the so called growth company access to the capital. Value companies go the debt route because there is more in the way of earnings to dilute unlike growth stocks which tend to earn less.

In this week's Streetwise column Michael Santoli talked about the extent to which growth has outperformed value this year. The article reminded me of this aspect of yield curve analysis and sure enough the iPath Yield Flattening ETN (FLAT) has outperformed the iPath Yield Steepening ETN (STPP); a gain of 1.8% versus a decline of 1.8%.

Last year was odd. The Russell 100 Growth ETF (IWF) was down 0.62% and the Russell 1000 Value ETF (IWD) was down 1.00% while FLAT was up 24% and STPP was down 23%. Technically this yield curve indicator turned out to be correct but to essentially no benefit. As Karl Popper would have noted it only takes one negative occurrence to disprove a theory but I am not sure this disproves it. Still it is interesting in a market mechanics sort of way.

If this was ever very important it was probably in the 1980s, 1990s and the aftermath of the tech wreck when foreign investing played less of role for investors than it does now. While I look at this every so often I believe foreign country selection and sector weightings are far more important.
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Sunday Morning Coffee

From this week's Current Yield column in Barron's;

A rise in the benchmark 10-year note's yield to around 2.39% from just over 2% and the 30-year bond to 3.46% from 3.10% doesn't sound like much. But the resulting price rises wiped out several years' worth of the paltry income these securities generate. The popular iShares Barclays 20+ Year Treasury Bond exchange-traded fund (TLT), which tracks the long end of the market, lost 6.5% in the wake of the March FOMC meeting. That was equivalent to an 800-point-plus drop in the Dow.

It is important to understand what bond prices with longer maturities will do should yields move up meaningfully.

Training all day (literally) for the Fire yesterday and hazmat class all day today, normal blogging should resume Monday.  


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The Big Picture For The Week of April 22, 2012

After taking a closer look at the contents of Jason Bourne's safety deposit box I found one item not previously mentioned. Pictured is a Swiss Army Knife with an LED flashlight and a 32 GB thumb drive with all sorts of security features in it.

This of course would be the perfect addition to the bundles of various currencies, velvet pouch of diamonds, passports and his Sig-Sauer Sig Pro SP2009 (apparently his gun of choice). I also think he had a couple of Clif Bars in there too.

Really Bourne's thumb drive/LED/pocket knife would be titanium color but the ones I saw at the Victorinox web site that were that color did not have the LED which of course would be crucial for opening safes in the dark. 

I found this via Barry Ritholtz. Wired had a post on insanely expensive gadgets including a version of the thumb drive pocket knife that cost $3000. While I did not see one that expensive on the Victorinox website, the model pictured is still very expensive at $220.

Just a little fun today, insanely busy Fire Department schedule this weekend combined with re-finishing our floors.
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Anything Can Go To Zero

Sprint Nextel (S) made news yesterday because of allegations of tax fraud. Who knows where that will go but if you look at a long term chart you will see that in 1999 the stock was $70. Yesterday the stock closed at $2.40. Sprint was once a very widely held stock that did phenomenally well going up 2400% from its IPO to its peak in late 1999 (according to Yahoo Finance).

We have seen this type of demise before with the "safest" of names like Fannie Mae and stocks that probably never should have gone public like Pets.com. I think most people remember how revered Fannie and Freddie once were. Another one from the revered category was Cendant which may not be as familiar. There was a stretch in the mid 90s where Cendant was very popular as a staple holding for a lot of investment advisors (talking long before it blew up).

Fannie and Freddie were reasonably placed on the same pedestal as Coca Cola (KO) and client holding Johnson & Johnson (JNJ). Sprint too and many others that one way or another failed (either literally or effectively) were very highly regarded. How about the entire US auto industry? The carnage there has been epic.

If we did some sort of poll and built a portfolio of the 20 safest names to hold for the next ten years, like so many magazines are fond of doing, it would be a very good bet that at least a couple of them would disappear.

This is not to say that predicting a failure at Pepsi or Honeywell would be anything but a lucky guess but that is the point. Any stock can go to zero. Apple could disappear. Again, not a prediction as there is no visibility for any of these to fail but it happens and often there is no warning--at some point starting in 2003 there may have been visibility at Fannie and Freddie as Freddie got into some trouble over accounting issues.

If you can accept that anything can fail then the issue of position sizing becomes critical. This has been covered here many times in terms of targeting individual stocks at 2-3% of the portfolio as many others go with larger weightings for their holdings. Getting caught in something that fails is not the worst thing that can happen to an investor because it can happen to any company. It is bad to get caught with 10% of the portfolio in something that fails and this happens. Based on experience working at brokerage firms, anytime there is a spectacular one day implosion in some stock there are invariably investors with only that stock in their portfolios and they own it on margin.

An extreme example but it makes the point.  
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Worst ETFs Ever?

Index Universe had a fun post isolating the five worst ETFs of all time. What this was really about was the five worst performing ETPs of all time. Their search found five funds all down 90% or more since their respective inceptions.

The five were;

• Market Vectors Solar (KWT) down 90.42%

• Guggenheim Solar (TAN) down 90.48%

• iPath Natural Gas ETN (GAZ) down 92.59%

• iPath VIX ETN (VXX) down 95.21%

• US Natural Gas ETF (UNG) down 96.23%

The list is interesting for a couple of reasons. Two of the five are solar and two of the five are tied natural gas. Also only two them, the solar funds, are plain vanilla. The ETNs have been done in by contango and lower prices in the underlying. Contango refers to the expense incurred when rolling a future contract out to a further month where the price of that new contract is greater than the proceeds from selling the expiring contract.

The consequences of contango were no doubt underestimated by most market participants in the early days of these funds but in terms being the worst ever they still have assets and are popular trading vehicles so I doubt the providers think they are the worst funds ever.

The "failure" of the solar funds is a different matter and I don't think of them as being bad ETFs (neither did Index Universe). I have generally been down on this group since this became a hot fad a little over four years ago; I don't think the economics work even if the technology does and would solve several problems.

The market voted with its feet on the stocks and the ETFs have tracked that performance. This is a positive for the ETF industry in that the lousy returns are attributable to the stocks in the group not the wrapper. 

Ideally a plain vanilla ETF (an ETF that just owns a basket of stocks) will boil down to the investment merits of the underlying and whether or not the diversification offered from an ETF is better than choosing an individual stock or not.

The most exotic I believe we have gotten with an ETP is the Pro Shares Ultra Short S&P 500 (SDS) which is not plain vanilla--no position in this fund now, we sold it in November and I would have no problem buying something like the WisdomTree Managed Futures ETF (WDTI), conceptually speaking, that is not a recommendation.

Like with just about any investment strategy or product, people will do serious damage to their portfolios when they have way too much exposure at exactly the wrong time. There will be another crisis, real or perceived, and many of the exotic products will again malfunction and although any such malfunction would be short lived someone people would be badly damaged. 
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We Are Not Doomed

There was a lot of American Way if Life Doom on the interweb yesterday. First was Why the Middle Class is Doomed by Charles Hugh Smith, then Retirement May Be Mission Impossible for Generation X and finally 10 More Years of Low Stock Market Returns.

Some will refer to these types of posts as fear mongering. I think I may have been called a fear monger in a recent post in stating I do not believe my wife and I will get social security. This might be one way to look at it but I think there is a more productive way to come at this.

I stumbled across a good way to articulate why I don't expect to get social security in the comments of a syndicated post at Seeking Alpha. Occam's razor; it is the simplest explanation given the current numbers, the likelihood that analysts will underestimate the problem and that the political cycle is not conducive to long term problem solving.

The above paragraph will either be right or wrong but I think it lays out a base case for what could go wrong with social security. Likewise the arguments in the above three articles also contribute to a base case of what could go wrong or maybe it is better to see these are some of the obstacles that people will face with retirement planning. The three articles address societal problems, unfortunate timing and what could be a lousy market for quite a few more years.

You might read all three draw the same conclusions, draw completely different conclusions or agree with only certain parts but the three combine to spell out the obstacles we are going to face. The articles explain these obstacles such that I think they promote understanding of what could go wrong for people. If you understand what could go wrong then you have a better chance of overcoming those obstacles.

You might believe social security will be there for you with no problems but certainly it cannot be a black swan for anyone if benefits get radically reduced.

From there, going about creating a solution in case the above scenarios do play out becomes at least a little easier. The context of my past posts has been to get out of debt, save more, live below your means, understand that certain foreign markets will offer close to normal returns, monetize a hobby as a post retirement income stream and anything else you want to add to the list.

One of the knocks against using a financial advisor is that no one cares more about your financial situation than you do. And while I think a good advisor will care a lot about his clients' financial situations, in a similar vein no one will care more about your own unique solution more than you.

This has been an ongoing theme on this site from the beginning and will continue to be so. It is an important topic, interesting to write about and will get more important and more interesting.

Unrelated, I created a Facebook page for the Walker Fire Department. If you use Facebook I would be grateful if you would like the page. You can find it at facebook.com/walkerfiredept.
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The Business of Giving Financial Advice is Complicated

I've mentioned that I am taking a hazmat operations class this month as I want our fire department to know more than we currently do (for anyone new I am the fire chief for a very small rural, volunteer fire department). Increased understanding of hazmat should allow us to operate more safely. The class I am taking is also a prerequisite for the fire academy. I was talking to one of the guys in the class on Sunday--he mentioned he is 29, married with a kid and wants to get out of the car business and into fire for several reasons including his belief that he is working in a toxic environment (metaphorically).

There have to be some decent folks working in the car industry but the picture painted for me by my classmate is probably what many people think goes on car dealerships.

There is some parallel to the business of giving financial advice. There is little in the way of barrier to entry and we know there are some dishonest people in the industry. Josh Brown took a machete to this post from a firm called Betterment which tries to democratize financial advice with low (or maybe no?) minimums using indexing strategy. The post from Betterment made a lot of sweeping negative generalizations about advisors and brokers--Betterment appeared to use the terms interchangeably which is not correct if preciseness matters.

Like any industry there are competent practitioners and there are incompetent practitioners. Where portfolio management is concerned an incompetent advisor may not be outed until something bad happens in the market, the tide goes out and as Warren Buffet has said we see who's naked. An example of this type of incompetence might be having had 50% in financials in 2007 by virtue owning a bunch of funds that were grossly overweight the sector.

Another form of portfolio incompetence would be stock selection that turns out to be peculiarly poor and is combined with inadequate diversification such that clients get blown up. These are just two examples.

On the financial planning front it may not take a bear market to damage clients. Simply embarking on the wrong course with a financial plan can be ruinous. Planning is not what I do but things like incorrect tax decisions, an incorrect spending program or insurance issues can obviously hurt people.

As far as what is not incompetent; if an advisor tells you ahead of time "we are going to hold on no matter what and rebalance" then going down 39% in a down 38% world is not incompetence. The prospective client needs to listen to that and decide "is that right for me." An advisor who sets an expectation and comes pretty close to that expectation is probably pretty good at their job.

There is another layer to the complexity I had in mind when I titled this post which is the advisor's own financial situation. There was an article recently (sorry no link I did not know I'd be writing about this) about a large number of advisors whose own financial houses are not in order. They have too much debt and don't save money. You might remember this from the NY Times a few months ago about an advisor who got caught up in the trade up/house as ATM trap and went on to lose his house.

This can be very complicated. Why is the advisor in debt and incapable of saving money? Someone with a sick child in this sort of situation is certainly different than the guy with a Ferrari and a boat. I would also expect that it is possible for someone to be very capable of giving excellent advice but be unable to see their own flaws, biases and tendencies (I can save later type of thing). How much does it matter if an advisor has negative equity and owes $12,000 on a credit card if he prevented all of his clients from panic selling a fast decline? Conversely, being debt free does not guarantee competence.    

Personally it would be difficult for me to talk the talk without walking the walk. I wouldn't know how to handle a situation where I was asked how much I had saved and how much debt I had if as an RIA in my mid-40s I had none of the former and lots of the latter.

As a matter of personal belief I as an RIA would not want to be distracted by my own finances. How much time spent on personal trading is too much? Is the advisor going to freak out about declines in his own account at exactly the wrong time? The client base of an RIA is a crucial asset--financially life-sustaining, our financial future rests with my doing the right thing for our clients. In that context it is crucial that the interests of the client base be put before personal trading and financial worries.This is more easily achieved by minimizing the chances of having these distractions.

My take on how to manage this has been to have no debt, save a lot, have low allocation to equities and not trade that allocation a lot. I typically have 25% allocated to equities but it is a little less now as I am hoping to shift into a particular ETF should it list.

My approach reflects my biases and the manner in which other RIAs address these issues reflects their own biases. Where we are talking about biases and quirks things get complex. Personal motivations are also complex. Some want to work for a very short time and figure an exit strategy. As I enjoy my job I view this as a potentially evergreen annuity--it won't stay green if I don't do the right thing.

If you have an advisor it probably makes sense to take some time to understand where he is coming from (to our firm's clients, the above is where I am coming from). RIA are going face more scrutiny along these lines from clients, prospective clients and even the media.

This was kind of a heavy post but just like everyone else, advisors have fears and greeds that when mismanaged can be very detrimental to all concerned. If you (as an advisor or client) can easily define your greed and fear then I think you have a good shot at getting to where need to to be financially.

Finally an update on Pips, the rescue dog Joellyn and I took to Washington State about a year ago to Conservation Canines. I think the picture says it all.
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Withdrawal Rates--It's About More Than The Math

Over the weekend readers left links to two different articles about withdrawal rates here and here. Zooming out a little bit there seems to be a theme popping up about the 4% rule being too conservative. The second link laid out where a 6% withdrawal rate resulted in a likely outcome of being out of money for the last 7.5% of your expected retirement years.

That will make more sense if you read it but if your retirement is 30 years then the last two years and three months you'd only have social security, no real investment portfolio. Maybe this is when you'd call Robert Wagner for a reverse mortgage.  

Obviously I believe in the 4% (or less) rule but I concede that I am very conservative and this is something that people with investment portfolios need to figure out for themselves. I will continue to make the case for 4%, depending on your interest level you may read other articles that compel you to be comfortable with some other number--6% represents a 50% raise after all.

If the 6% scenario above played out exactly as the numbers indicate then you'd better hope that social security is still there and paying what you need it to pay. When I wrote about social security a few days ago one reader seemed to be saying the social security is just fine. I'm sure that is the conclusion he draws and I am sure we all draw our own conclusions about the likelihood of getting all or some of our social security.

I assume I will get nothing. Some may assume they will get the entire payout (this is certainly reasonable for people above a certain age) and some might assume some reduced portion. Whatever you believe you will get from social security would play into whether a 6% withdrawal rate makes sense for you. If you are expecting any number greater than zero, then you need to figure a confidence level in that assumption.

I'm pretty confident about zero.

A personal concern I have with most of these articles is the assumption of linear returns combined with one-off expenses. For someone with a $600,000 portfolio the combination of a year like 2008 and needing to replace the roof could be devastating. Let's say these people take out their 4% plus another $20,000 for a roof (does that number make sense?) and the $360,000 in equities (so a 60/40 portfolio) went down by 25% (a pretty good result by 2008 standards). So what started the year as a $600,000 portfolio is now down to $476,000 to start 2009.

I would submit that many people will have more than one really expensive one-off during their retirement. What if the next really expensive one-off comes during the next bear market? This sort of stuff contributes to my being very conservative on these issues. Obviously you reading this must decide for yourself and then own the success or failure of your decision.
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Sunday Morning Coffee

A few days ago Google announced a stock dividend (essentially a stock split) whereby the price of one share their current class A shares will be cut in half price-wise and they will get one share of a new class C share that will start at the same price but the voting eligibility between the two will be different. This post is not really about the specifics of the split so if you want more information just look up news for GOOG.

In the aftermath of the news I found this post at Seeking Alpha about what will become of the options. It was not clear to me whether the author knew what would happen with the options or did not know but existing options will become adjusted options and new options for the post split shares will be issued.

The strike prices of the adjusted options will stay the same but the underlying shares will be different. Instead of a call option struck at $600 representing 100 shares with an at the money value of $60,000 the adjusted option will be at the money when the value of 100 shares of the class A and the value of 100 shares of the class add up to equal $60,000. If 100 shares of class A is worth $32,500 and 100 shares of class C is worth $31,000 then the adjusted option struck at $600 would be in the money by $35/share.

The reason to mention this is a behavior that seems to repeat in these situations. After the split the adjusted options will be listed right next to the unadjusted options. People will see one $500 call option that is close to worthless and another one at something like $130 or $140 while the stock is at $300. They will think they can sell the $500 call option that is $200 out of the money and pocket the $130-$140 premium--FREE MONEY!

Of course they are not selling a call option $200 out of the money but are actually selling a call option $130 points in the money and are actually naked for not having the 100 shares of class C they need for the position to be covered.  

If you are lucky and spend a lot of time with option chains then you might, I say might, find occasions where the options market gives away nickels and dimes worth of premium but the options market does not give away hundreds of dollars in premium. Maybe you have experience understanding adjusted options but I promise that there will be people trying to do exactly the trade I describe above and because it has been so long since I worked at a brokerage firm (I have worked on the buyside for many years now) I don't know if they try to protect clients from their own greed in these situations.   
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A Response to Chuck Carnevale

An advisor/blogger named Chuck Carnevale wrote a post called Volatility is not Risk which he said was "inspired" by my post from last Sunday. Here is a link to the Seeking Alpha version which drew a lot of comments as of the last time I looked. Chuck was kind enough to let me know ahead of time about his post and I believe he invited me to respond. He said he generally views many aspects of portfolio management differently than I do. It appears as though he focuses on dividend stocks but I do not know if he does so exclusively.

There are countless ways to have success in markets both in nominal terms and risk adjusted terms so different approaches are of course valid. No single approach can be best for all times and all market conditions (a point I have made many times), all approaches have flaws and attributes and ultimately each end user must settle on what is best for them.

In my post on Sunday I talked about complacent attitudes toward risk that develop after something has been working for a while and I talked about strong holders of a stock versus weak holders and that weak holders are the ones who typically panic sell. I used the example of client holding Philip Morris Intl (PM) and its 32% drop into the 2009 low as an example of weak hands selling.

Early in his post Chuck said he took "exception" to a couple of points that I made. He said my "assumption that a bear market will provide a tragic outcome because dismayed investors will panic is more assumption than fact." He took further "exception" to what he believes is my insinuation "that dividend paying stocks are not safe investments." Finally he thought my example with PM was misleading.

Before responding I should note that the article is very long and I may have missed some of Chuck's contextual points.

He starts out making his argument by acknowledging that weak holders do exist but I think he then goes on to say that if they do exist it is because of "the preponderance of negatively biased information that is promulgated upon the general public, especially regarding equities and how risky they are.  In other words, if people were offered a more reasoned perspective, then perhaps much of the irrational and catastrophic panic selling that Roger alludes to could be avoided."

If Chuck is calling for more reason during times of large and fast market declines then (shameless self promotion alert) I would point him to this blog starting long before the 2008 bear market and then all the way through it in terms of pre-planning a defensive strategy ahead of time while still in a rational state of mind and then sticking to it. If anything, the time to worry (not the best word because of the emotion implied) is right here right now while things are going well in the market.

Frankly as I read that part of Chucks article I don't think it had much to do with my post. Yes, there should not be a lot of articles that engender fear after the market has dropped a lot but there are. Putting aside that I have a track record for writing keep your emotion in check articles after the market has gone down a lot the fact remains that many market participants react badly in the face of large and fast declines (otherwise there would never be any large and fast declines) and anyone not realizing this ahead of time (this is the context of my posts before the crisis) will be shocked. Human behavior is such that we tend to make poor decisions when we are shocked or in some other heightened emotional state. This is my "assumption" based on first hand observations going back to 1984 and also based on talking to clients in the various roles I have had in the industry over that time.

The "tragic outcome" occurs when people have not prepared mentally for a large decline. There will be another nasty bear market, people will panic sell because they did not prepare and somehow forgot what the last one felt like. I have seen this repeat cycle after cycle and I would think Chuck has too, having been in the industry longer than I have. People should not panic but they do. Realizing ahead of time that others will panic can help you prevent your own panic--again this is the context of my thread.

As far as insinuating that dividend stocks are not safe, he outlined his belief that bonds are currently more expensive. They probably are more expensive. I have been writing for several years the extent to which we have been keeping maturities very short because of what I believe are persistently unattractive risk reward tradeoffs going further out on the curve.

"Dividend stocks not safe" is pretty vague as many banks with great dividend histories proved out to not be safe. The full context of this idea is that for investors or advisors who don't know better, a 32% decline in PM (sticking with the same example) is not "safe" if they were expecting a bond substitute which is how dividend stocks have been portrayed in many places. We have owned PM for many years (started the position as Altria) and did not sell it as part of our defensive strategy because of the yield, the elasticity of demand for the product and history of doing relatively well during bear markets/recessions. A 32% decline in a down 56% world is a great result for a stock in my opinion but I think it is terrible for someone who was expecting no decline (no decline is of course irrational perception not potential reality).

Chuck made the fundamental case for why PM should have been held onto and while the business did just fine the stock did drop 32%. If in a couple of years (or sooner) there is a 30-40% bear market decline I would expect PM to drop 15-20% regardless of whether it was justified and would be thrilled with that result in the context of it being an equity holding. If I explain the holding to any clients as a bond substitute and it dropped that much I would expect my phone to blow up and if the bond portion of client portfolios were heavy in stocks like this I would expect to lose clients.

Part of what I try to do as a portfolio manager (my perception of how to do the job) is to let client assets grow when conditions are favorable and protect client assets when conditions aren't so favorable. Part of this process then is understanding/remembering how people and markets react under stress and often people and markets react poorly under stress (repeated for emphasis). They shouldn't but they do.

As I say early on above (and throughout the life of this site for that matter) Chuck makes a point about what is best for him (and his clients have to buy into that to be happy) and I make a point about what is best for me (and our firm's clients have to buy into that to be happy) and if you are a do it yourselfer then you might find bits of process to take from each, one or neither to create your own process.

On an exciting personal note today is the Prescott basin Ops Drill which is annual interagency training drill with two components; a simulation of a Type 3 Incident (which is pretty big but not Wallow Fire size) and some form of training for the boots on the ground firefighters. I have been part of the group that organized the event for the last two years which is a new role for our department and we have always participated in the boots on the ground training but this year I'm going to have a chance to be involved with the simulated incident as the deputy incident commander which a great for our department and recognition that a Type 3 Incident could easily start in Walker and having us involved might make sense-at least that is how I am taking it and am very excited for the learning opportunity.
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BOOM! Goes the Social Security Assumptions

There was an article in the WSJ yesterday about the IMF warning anyone who will listen that models for life expectancy currently being used by pensions and government entitlement programs underestimate how long people will live. The conclusion was that this adds about $7 trillion to what most studies believe to be the totality of the social security and medicare future shortfalls.

Over the years the articles I've read about life expectancy seem to believe that expectancies will increase at an accelerating rate due to medical innovation. When I've mentioned this in the past there have been comments about not wanting to last for years in a frail state needing to be cared for down to the most personal of daily tasks. That is not the context of the work being done in the field.

Obviously it will be a couple of decades or longer before we know whether this holds water and if it does, how much water it holds but we know that people generally are living longer and we know that there will continue to be medical advancement and we will learn more about nutrition and other lifestyle habits that offer the plausible outcome of living well for a longer period of time.

Where this possibility exists it drew one very funny comment about encouraging smoking and repealing motorcycle helmet laws (amusingly helmets are not required in Arizona).

Perhaps with a bit of confirmation bias I believe this supports the idea of social security and medicare looking much different in some number of years (ten? 20?). For many years I have been saying that the programs as we know them are not sustainable. I think that whenever things actually hit the fan we will look back and unsustainability will have been obvious like the way we look back on the tech wreck and the financial crisis (hindsight bias).

Not being an actuary or demographer I certainly have no idea how far down the net worth/income scale that benefit cuts will come but a lot of people relying on social security will have a serious and unfortunate situation befall them which of course is not only a micro problem but will also be a big macro problem.

I tend to believe that plenty of people will figure ways to get by without being homeless even if it is difficult, involves a lot of sacrifice and taking some sort of job that they view as undesirable. There will still be a lot of problems on the personal economic front but individual problem solving is worth something.

Individual problem solving is what living below your means (something I've written about almost obsessively) is all about. Spending less allows for saving more which hopefully results on less reliance on a social program that may not be there for you. This does not mean live like a monk in a cardboard box but presumably as you get a little further along in your profession and start to make a little more money you could increase your personal savings rate.

Also if the scenario of making more plays out for you for a while but then derails (through no fault of your own--I hate that saying) then you obviously have an easier time covering your monthly expenses either through savings or getting a job at Home Depot or the like. You can cover a decent portion of a $2000-$3000 monthly nut compared to $8000 in expenses with a $10/hour job until the career gets back on track. I speak from experience here. During the year before I started at Your Source I helped put a roof on a garage, helped build a rock well and did some logging among other things to supplement the income that went with only having a couple investment management clients.

On a lighter note, the pictures are a before and after of Smitty, a dog who was dumped on Walker Road. I was on my way to administer a pack test (three miles wearing a 45lb pack with a 45 minute time limit) for three of our firefighters and I saw him on the road. I could not get him to come to me and had to go so I called Joellyn and she and Wiley (one of our dogs) were able to get him into the car in about 30 seconds. We are now fostering him but will not be keeping him.
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Small Trade Executed

Late in the day yesterday we bought shares of Kinder Morgan (KMP) for most large accounts that did not already own it (large being defined as large enough where using mostly individual stocks with a few ETFs mixed in makes economic sense).

This year we've generally gone along for the ride in the rally but done so with a fair bit of cash. We increased equity exposure late in 2011and on into 2012 but still had some cash to be deployed. YTD there hadn't been much of a pull back but since April 2 there have been a lot of down days adding up to about a 4.3% drop. That is not a lot but it is more than has been for a while.

If this drop is about over for now then the timing will have been good and if the drop is the start of something more serious then a name like KMP with generally lower volatility and higher yield is a name we would want. Note that as we had a 50% decline in the SPX in 2008 and into early 2009 it is very unlikely that there would be such a large decline again so quickly. Our recovery has been anemic and plenty of other foreign markets have more compelling investment cases but I do not believe we are Japan.

We still have cash to deploy if market conditions dictate and of course we will always heed a warning from the 200 day moving average should it occur.
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13F ETFs Are Coming! Stay Away!!

For many years I have been saying that the ETF industry will continue to offer products that offer exposures that were not previously available to retail investors. Some of these will be very useful like, IMO, foreign bond exposure. Not as useful will be a category that is popping up that targets 13f filings of various hedge funds and endowment funds.

The 13fs are very useful for trying to learn about thought process, investment process, portfolio construction and possibly other strategy concepts that can help with becoming a more knowledgeable investor. That all sounds pretty good. What doesn't sound as good is that 13f are reported with a lag and similar to traditional mutual funds there is no way to know what your favorite investing luminary owns right now unless you find an fresh interview offering candor of current trades/positions.

If fund providers are going to offer these funds then there must be some compelling results somewhere but it still boils down to the funds investing on stale information and the possibility that some manager who was big on some theme may have done a 180 on the concept and sold out completely with fantastic timing right before the theme goes death star while the 13f fund could still be heavy as the theme implodes.

Something I probably should have said more often in the past is that I think it makes more sense to devise strategies and implement portfolios using plain vanilla baskets of stocks as opposed to ETPs that have a lot going on under the hood (the context here is exposures where you decide a fund is better than an individual issue). Going 100% plain vanilla might be difficult (we have used SDS in the past and that is not plain vanilla) but going mostly plain vanilla is easy to do and removes additional variables that can cause some sort of malfunction in the fund like the recent news made from the VelocityShares 2x Daily VIX ETN (TVIX).


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Sunday Morning Coffee

Barron's had a recurring theme this weekend about complacency toward risk and the amount of risk that investors now appear to be taking.  

As for complacency the Striking Price column included the following; "Selling puts that are 5% or 10% below the stock price and that expire in three to six months never hurts..." Selling puts was generically a great trade in the 90s then the tech wreck came along and put sellers were crushed. Then there were a few more years of good times followed by the financial crisis which again crushed put sellers. The market is now three years from the low and put selling has generally been a great trade again. While there is no way to know when, I promise you there will be some future event that again crushes put sellers.

For anyone unfamiliar when you buy a put you have the right to sell stock to someone (the put seller but actually early assignment is random) at the strike price of the option. Buying a put is either a hedge or a speculation that the price will decline, the seller of the put does not expect the price to drop below the strike price of the put he sells.

The context of the Barron's quote was selling puts 5-10% out of the money targeting a three-six month expiration. A great example of how this can blow up can be found with Akami (AKAM) from 2000. On March 10 of that year the stock closed at $296. A put 10% out of the money would have had a strike at $260 (if memory serves, up that high strike prices were struck every ten points) and based on the Barron's comment someone may have sold a June or July strike (I don't remember the cycle that AKAM was on back then) or maybe September or October.

By April 10, 2000 the stock was down to $133. By May 10 it was down to $77. The put sold in this example that was $35 out of the money was $183 in the money. This is likely a permanent impairment of capital when it is bought back or if the position is held until expiration resulting in assignment. The seller of the put must buy 100 shares for $26,000 when the market value is only $7,700.

The reason I think AKAM is a good example is because there was no fraud at the company, it did not fail--it actually has a very important function but it got caught up in the hype and then got crushed.

The next time selling puts becomes a bad idea there will be people short a whole bunch of puts from the "wrong sector."

The other point from Barron's (this was repeated in a couple of places) was a repeat of the idea that the Fed's interest rate policy (and the other attempts to stimulate the economy) are forcing investors into other instruments to seek a "reasonable return."

I hate this line of thinking. It would be great to get a "reasonable" rate of return from cash and treasuries but for now that is not the case. That people put what should be their low risk dollars into higher risk instruments to get a return they used to get from cash has tragic outcome written all over it. If there is another bear market before interest rates normalize there will be an avalanche of dismayed investors panic selling their dividend stocks because they thought the stocks were "safe."

There are a lot of people who have put cash and bond money into dividend stocks because dividend stocks have done well lately and either they or their advisors have become complacent about the risks of owning stocks. We all have some amount of our liquid net worth that should be in cash. For one person it might only be 2% and for someone else maybe it should be 90% but either way too much "safe" money into stocks has a high probability of ending badly. Opportunity lost is far better than actual money lost.

As a note to the dividend crowd at Seeking Alpha, this is not pointed at you, some of whom say they like it when prices drop so they can buy more and so on. If you comment regularly all over that site about dividend stocks and do what you say you do then you are strong hands but the people above would be best thought of as weak hands. All stocks have strong and weak holders and I promise you that the weak holders will sell into the face of something bad--this is normal market behavior and has nothing to do with the merits of a stock or a strategy. I believe client holding Philip Morris Intl (PM) is favorably viewed by the dividend crowd yet it went down 32% from when it spun off in March 2008 into the March 2009 low--weak hands not bad stock.

The picture is at Crater Lake from 2010.
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The Big Picture for the Week April 8, 2012

There were a couple of articles this week about retirement planning. This one from Market Watch says the 4% withdrawal rate doesn't cut anymore because people are living longer and this one from the Washington Post (via Barry Ritholtz) casts serious doubt on our collective ability to do the job of planning our financial futures.  

The Market Watch article found some research that concluded that 3.5% was about right when today's longer lifespans are factored in. The article also discussed some work-arounds that the financial services industry has come up which includes dividends only and figuring a way to absorb fluctuating withdrawal amounts.

The WaPo article mentioned that in 1983 31% of households were at risk for not having enough to maintain their standard of living in retirement and in 2009 that number had gone up to 51%. We all have seen various statistics about how little we have saved--things like no one in America has more than $25,000 saved (slight hyperbole). This article was also about financial literacy and the extent to which we are incapable of managing our 401ks.


The most useful thing about the 4% rule is that it creates a benchmark of understanding of what a piece of money can realistically do and what it can't. My last post about this seemed to ruffle a lot of feathers in the Seeking Alpha version but the big idea should be that each person must figure out a solution that works for them and whatever it is about their circumstance that is unique. 

A $1 million portfolio can most likely handle a $30,000 to $50,000 but not a $80,000-$100,000 and this often comes as hard medicine to people fortunate enough to accumulate that much. Obviously the less you spend the better chance you have of not running out of money. Beyond that, whether you index it for inflation which would be more complicated or just take out 1% every quarter it is very unlikely to make a difference (a 5% withdrawal still has a very high success ratio). I prefer simpler and would encourage simpler but each do-it-yourselfer needs to do whatever they think makes the most sense. 


Obviously I place a lot of importance on the expense side of the equation. For most people this is easier to control than the portfolio performance. Without a mortgage, car payments or credit card bills to pay, what then becomes essential spending? Various monthly utility bills, various insurances, various taxes, groceries and gas for the car covers most of it. Then add the one-offs which we have no control over and the everyday fun expenses like eating out or movies but the everyday fund expenses can usually be controlled. 

Beyond that it gets into bigger fun expenses that may or may not be affordable. The last big item I can come up with (although I am pretty tired from a very long hike) is any sort of family obligation like caring, financially, for a relative (our own potential cost like this is covered in insurances and and one-offs). Not everyone has visibility to this and people tend to have their own ideas about how much they actually need to help a relative. 

I also think monetizing a hobby or interest is a great way to relieve some of the financial burden and remain engaged (this whipped up a hornets nest in the comments the other day). Someone who can "retire" without drawing from the portfolio one way or another for five or ten years (this will probably take years to plan) obviously has a much better shot of having their money last and not having stress over their finances as they age (or maybe less stress anyway). 


One new possibility for me might be fire department related. If I last for a while as the fire chief of our department (I hope/plan to) then down the road there might be a chance to offer training for new chiefs of similarly situated departments. There are classes like this and as of now there is no way to know whether I could do this it is just a thought. For the one or two readers from earlier in the week who got very upset about my hazmat instructor, our department has no pension and gets no tax revenue, we are a non-profit and there are no permanent employees (we do pay for weekend shifts during the fire season). 


The pictures; yesterday we hiked up Granite Mountain and then took a drive to Yarnell and saw the Thunderbird in Peeples (correct spelling) Valley.
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What Do Reserve Currencies Mean To You?

Yesterday FT Alphaville had a short bit about whether the Australian  dollar was becoming "a" reserve currency. I put "a" in quotes because it would be hard to figure how there would be a bunch of reserve currencies--if there were, then it would be a different concept which is what the world might need.

The reason the Aussie can't be the world currency is that it is too small. There was a stretch there where people thought the Swiss franc should play into this equation but it too is too small. All of them are too small to be a reserve currency, as we now use the term, except for maybe the euro but that seems very unlikely to occur given what a mess the continent is. Again maybe the entire concept should change; maybe the Brazilian real should be some sort of benchmark for Latin America, the Aussie for Oceania and so on.

In relating this to what an individual investor should do I think about a couple of different things. One is the Nassim Taleb concept that I first mentioned a few years ago about having 90% of the portfolio in t-bills from around the world and then going berserk (my word. not his) with risk with the other 10%. 

His idea was to be country agnostic by holding currency in one form or another from many different countries to avoid some sort of black swan taking down the one country that you might be home biased in or some sort of predictable event taking down one single country. I first started using foreign t-bills and currency ETFs in client accounts in 2006 but nowhere near the proportion that Taleb talked about. We do a little more with this than we used and will probably increase this some in the future with more t-bill or note exposure. 

This sort of exposure was obviously going to get easier to access and this has been the case. WisdomTree, PIMCO and iShares have come out with products that target various foreign bond market segments and average maturities and of course there are quite a few currency ETFs. If I had to guess however I think the ETF industry is less interested in currency funds than bond funds. 

The New Zealand dollar won't ever be a reserve currency but there are some favorable attributes and depending on portfolio size it would be possible to add exposure. I think there are currency accounts where as little as $10,000 will allow for holding a currency and although bond minimums tend to be around $100,000 this will come down if it hasn't done so already in some places.

Bigger picture this is a world getting flatter/US becoming a little less relevant portfolio concept. The idea of home bias is not new here. I've told the story about being on a panel at a conference with someone from Turkey who said 15-20% in the home market (that being Turkey) was typical. If the world is getting flatter then moving closer to the Turkey example is plausible. I'm not saying 15% domestic will ever make sense but I have been saying that less domestic exposure than people had in the 1990s does make sense.

On a lighter note the other think I think about in this context is the Jason Bourne safety deposit box. You might have a Hungarian passport, a pouch of diamonds, a few stacks of Swiss francs and Sing dollars, a small roll of duct tape (I have this in my fire pack and it has come in handy on wildfires before) a gun of course and maybe a couple of Clif Bars. This bit with Bourne's safety deposit box really amuses me.


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Deep (Portfolio) Thoughts With Marc Faber

Marc Faber's latest thoughts are making the rounds including in this blog post from the WSJ. The big picture view is that Faber thinks inflation will erode the assets of the wealthiest among us. More interesting was Faber's idea of a sort of everyone into the bunker portfolio. Per the WSJ Faber likes farmland, entire islands, real estate in New Zealand, Canada and Australia, foreign stocks, precious metals held in other countries, diamonds, stamps, art and defense stocks. 

 Most of these can be bought through the capital markets even if there aren't ETFs for all of them.


For farmland there are dozens of small, foreign, illiquid stocks that I've written about before. At times these do very well and at other times they trade like they are going out of business quickly. Two of the easiest to research and trade are Cresud (CRESY) and Adecoagro (AGRO). I think that some names in this group will be huge winners if the world goes down some version of a Malthusian path (I think there is a high probability of this). 

As for buying an entire island, believe it or not you can get pretty close. Dole Foods (DOLE) apparently owns just about all of the island of Lanai in Hawaii. a quick glance at the company and there aren't too many reasons to buy the stock. It has badly lagged the Staples Sector SPDR (XLP) and there is no dividend. Perhaps there is a turnaround story in there somewhere but if you know any ways to buy an island without actually buying an island feel free to leave a comment. 

There are real estate stocks in New Zealand, Canada and Australia. Including Australia in this list is a surprise as there is visibility for some serious problems (although nowhere near as bad as the US). From New Zealand the name most people would likely know is Kiwi Income Property Trust (KWIPF) which I believe was favored by Peter Schiff. It owns property in New Zealand (no surprise) and according to the quote page at the NZX web site it yields 7.5% but Google has a lower number and and Yahoo shows no yield. The chart makes it look like the stock has trouble keeping up with the dividend.

The first name in Australia that I think most people would think of is mall operator Westfield Retail Group (WFGPY). It appears to yield 4.5%. A more industrial name would be Goodman Group (GMGSF) which yields about 3.5%. Goodman has been the more volatile of the two but neither has done much in a while so again, maybe these are turn around stories.     


A couple of names to get started with from Canada could be Boardwalk REIT (BOWFF) which is a residential REIT and a more diversified name would be Canadian REIT (CRXIF). 


Foreign stocks are obviously well covered in the ETP space and there are gold ETFs that hold the metal in other countries but I think Farber means buy some precious metals and put them in a vault in Switzerland (or the like) like Jason Bourne had along with a bunch of passports, foreign currencies and a gun.

We may not have to wait too much longer for a diamond ETF. As was widely covered, IndexIQ has a physically backed diamond ETF in the works. This really is more of a curiosity for me than anything else. I find it fascinating when it actually lists (assuming it does) the entire AUM will fit into an envelope. 

Stamps and art are a non-starter for me. The statistics for these things are always impressive but I am always skeptical. There is no reason for an art lover or stamps lover to buy whatever they want if they can afford it but the expectation of it going up like an investment has a high probability of disappointing. 


Finally for defense stocks there are plenty of individual names to choose from along with ETFs like the iShares Aerospace and Defense ETF (ITA), the SPDR Aerospace and Defense ETF (XAR) and the PowerShares Aerospace and Defense ETF (PPA). 

The point is not to assemble this portfolio but to think about what is on the mind of someone like Faber and how to access some of the themes he thinks are important right now. I doubt any of the above will make their way in to our portfolio unless they are already there (gold and a defense stock) but you might find a Canadian real estate company (just an example) that becomes a ten-bagger. Plus I think these sorts of posts are fun.
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Apple Does All the Heavy Lifting?

This week's Barron's Technology Trader column made an interesting point about Apple (AAPL). The focus of the article was the extent to which Apple's results, by virtue of the company's massive market cap, have contributed to the top down results of the S&P 500.

Per the article, in the 2011 Q4 earnings for the index were up 13% but excluding Apple they were only up 10%. Another nugget; S&P earnings had an average beat of expectations of 1.8% but without Apple there was an average miss of 1.4% of estimates. 

This sort of thing represents a narrowing of market leadership which has happened plenty of times in past market cycles and typically occurs later in the cycle meaning this is an indication of a decline of some sort coming soon (maybe a bear market?). Of course there are always things to indicate the market is going lower just as there are always things to indicate the market is going higher. For people who make active decisions the task becomes weighing between the two and also deciding which things to give more credence to.

Narrowing leadership is one that I think is important but I do not think by itself implies imminent decline. My base case for 2012 was a very large, fast rally that would then mostly retreat leaving us with a small gain (hopefully) for the year. So far this base case is not wrong and the narrow leadership issue aside lays out a cyclical argument for 2013 being a down year; four years with out a down year for the S&P followed by a down year in 2013 (2012 was a push?). There is enough precedent for this for me to find it compelling, I realize not everyone does.

Now adding in the narrow leadership which can take months to matter and I think my scenario of a peak sometime in the middle of the year followed by a decline that starts thereafter and carries over into 2013 such that next year finishes in the red seems to have a high probability compared to many other outcomes. Again this conclusion is based on my weighing of various things which lead me to the 2012 scenario which for now is still alive. 

In terms of portfolio implications, if you apply this type of process to your portfolio then you probably want to stick with it until it starts to prove wrong. My thesis is not wrong...yet. 

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Real Life Retirement Example

One of the Fire Department training objectives for this year that I came up with is hazardous materials. We've never had it before and given all of the old mines in the area it seems like a good idea (beyond all the regular hazmat that people have in their homes). There are several levels of hazmat training and this month I am taking the Hazmat First Responder Operations class through Yavapai College. It meets every Sunday in April except for Easter. I'm taking this class as a sort of guinea pig for the rest of the department.

The instructor, whom I just met at the first class session yesterday, is an interesting guy who seems to be a great example of some of the retirement things that I write about here. Without getting too specific (obviously I don't know any of his numbers) he is in his early 60s and married. Most of the guys in this class want to become career firefighters so our instructor talked at length about how the pension works.

He said his pension is 50% of his highest pay for a year and that he has been collecting for 17 years, so since his mid 40s. He has two part time jobs now that he loves doing because they tie in with two of his interests. He teaches hazmat classes all over the place including the college and works two afternoons a week at the college's photo lab--he told us he likes to take pictures with film.

I have no idea if there is any sort of investment portfolio but I can't imagine a pension for a captain who retired 17 years ago can be a fortune but his wife has a pension from teaching plus his two jobs (not sure if she works) and he seems to be doing well. The interesting thing is this was exactly his plan when he joined the Prescott FD in his mid 20s. Work 20 years and then take the pension. The ambition of the plan was financially modest but tailored to his interests which is something I've obviously been writing about for years here.

There is a hazmat class called Hazmat First Responder Awareness which is only eight hours that I'll probably arrange for the rest of the group.

Short post, the hazmat class moved around my regular Sunday routine.
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Sunday Morning Coffee

A more accurate title to this post would be "4% of what?" as that was the nature of a discussion in the comments of this article at Seeking Alpha. There were varying opinions on how to determine where the 4% should come from; should it be net of various investment expenses paid or not.

Some said with absolute certainty that fees count toward the 4% and there was equal conviction that they shouldn't. There was also some discussion about adjusting the withdrawals up for inflation.

The easy one first. Fees means what you pay for someone to manage your money. This can be a management fee to someone like me, the OER for any funds that you might use, or both. The fees only count if you, the end user think they should count. What I mean is that this is an individual decision to be made by the end user.

That being said I frame all of this differently than the conversation had in the above linked post. The idea of 4% is based on the probability of a nest egg lasting based on various withdrawal rates with the optimal number generally being 4% (I think actually it is 4.2%). Above 4% and the probabilities of success go down quickly. 

In past posts I've used the phrase whatever you got, 4% (more like 1% per quarter). On the last day of the quarter, if the portfolio is $616,000 then a $6160 withdrawal, to last for the next three months, would comply with the 4% withdrawal rate. If three months later the amount is $621,000 then the withdrawal should be no more than $6210. This focuses on the bottom line of the portfolio where growth in the portfolio is a combination of price appreciation and dividends. 

You may conclude that this makes the income stream somewhat unpredictable but in most instances the variance would be a few hundred dollars which seems far less problematic than being 83 years old and very fit with only $48,000 left.


A different way to go about this that seems popular is to just take the dividends. All I'll say there is learn about both (or any other methods) and choose what makes the most sense for you. 


The idea of boosting the withdrawal for inflation such that if this year you start out at 4% and the following year you take 4.1% because some measure of inflation went up 2.5% has never made sense to me. I've never heard of anyone actually calculating their withdrawal rate to come up with a 4.0243% safe number. Additionally to the extent that the general tendency of equity prices is to go up over time, then the price appreciation is how the portfolio builds in inflation. 

If the portfolio was worth $616,000 year ago and then this year it is worth $684,000 then there is potentially an 11% raise in the withdrawal rate if that raise is actually needed--all the better if it is not.


The above may or may not seem logical to you, it does to me, but it isn't the reality of too many of our clients, if any. My more practical observation is that the client is educated about safe withdrawal rates and probabilities, the client then comes up with some number they need per month that may or may not tie in with 4%, we'll ask about places to cut back if the number seems high, they will say yes or no to cutting back and then that number will stay the same for a while until/unless some sort of significant life event occurs.


A $3900 monthly withdrawal rate might be a high number for a year or two but often the portfolio can grow into that number being "safe" or safer. Of course there is not guarantee of this. One common type of problem I've seen that really hurts this model is the person who regularly has $10,000 (or more) one-offs. For anyone new a one-off is some unbudgetable expense like a vet bill or new tires or a home repair issue. These are the more common one-offs. Some folks have uncommon ones. I don't know what they are but some folks have more uncommon (meaning more expensive) one-offs than other people and this creates a greater risk to the sustainability of portfolio.  


Of course there are also people who simply spend too much anyway you cut it.


As hopefully alluded to there are a lot of variables to how this plays out for everyone. The basic idea of 4-5% is perhaps best thought of as a starting point or a building block for how much needs to be accumulated and then how much can be taken out. A 5% withdrawal rate would work the vast majority of the time but the probabilities of success go down some. Trying to make 4-5% work while understanding that 8-9% is much much riskier is the bigger picture point of understanding. A $1 million nest egg makes for a modest retirement not a wealthy one. 

From there it is hopefully common sense that the more that is spent the greater the chance of running out of money. After these big picture issues are digested is when your specific details start to fit into the puzzle. By details I mean things like how you manage your portfolio, whether you have a part time secondary career, whether you move, how you mange debt and every other thing you can think of. 


The picture is a friend's (inherited) Harley Davidson from the mid 1950's (I think that is when it is from) that his father bought brand new.
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