Best of Newsletter November 2017

Each week I send out a free email newsletter, you can subscribe over to the right or at the end of the post. 
In the last newsletter I talked about my 401(k) Pros and Cons Article.  That one is still one of my faves, so if you haven’t read it make sure to and if you have, go back and read it again, it’s still hilarious and informative.  Anyway, the sequel is How to Invest your 401(k).  This one isn’t as entertaining, but it’s definitely still informative.
A Bunch of Book Lists
Book list is definitely my favorite article type.  I get to revisit fun books and passive aggressively criticize ones I leave off the list.  Plus, as an Amazon affiliate, I get like 4% or something of the book price if people actually buy books off my list.  Free money.
So, while the Packers were breaching yet another level of mediocrity or, really, outright excruciating horribleness today, I sat down and created five books lists. The first has a relatively boring title but they get progressively better after that.
There are also bonuses in a few of the articles (spoiler alert: all of the bonuses are books I wrote or affiliate products).
All in all that’s 29 books to read.  Great head-start on a New Year’s Resolution.
Portfolio Review
For new readers the best page to learn about my goals for my website is the start here page.  I talk about Pat Flynn, who is my role model for the guinea pig design of the site, and the different pillars of my plan to become rich af, and I lay out where to get started for each pillar.
The backbone of the finance pillar is the portfolios I track.  For most investors, professional and individual, active management is more a road to ruin than a road to lifetime success.  Unfortunately, this has led to a mass proliferation in passive investing strategies, driving up the prices on their member stocks to unappealing levels.
The portfolios I track span the spectrum of active vs. passive management, and they also seek to contain catalysts or other factors that preclude them from institutional impact.
This week is portfolio review week for the newsletter.  I will identify some key changes in the make-up and returns for each one and (start getting excited now) create a new one.  You can find the portfolios here.
Let’s start with:
My Personal Portfolio
I don’t vote.  The policy differences, in practice, between the two main US parties are so marginal as to not exist.  George Bush started the TARP program.  Barack Obama never shut down Guantanamo Bay and increased the number of American soldiers milling about in the Middle East.  Donald Trump will be the first pro-gay marriage US president.  Hillary Clinton is, possibly, the most Wall Street friendly politician in Washington.
That said, there were enough differences between the policy promises this year that there are ways to trade around the election of Donald Trump.  Take these suggestions with a dump truck of salt, of course, because the last several presidents have seen a 97% or so (anecdotally) difference between policy promises and results.
  1. Buy coal and sell solar – Even if you ignore the moderately more free-market stances of Trump, his complete denial of climate change makes you think there will be both a reduction of regulations on coal miners and a reduction in subsidies to solar companies (who cannot persist without them).
  2. Buy financials – All the backwards and unsuccessful regulations on financial corporations may be repealed.  It’s also possible that Trump will be snubbed by the Goldman CEO or something and nationalize all banks.
  3. Buy healthcare – If Trump follows through with promises to delete Obamacare and increase competition in the healthcare sector, look for an increase in profits in this sector, as well as multiple expansion as uneasiness about the future of the sector is reduced.

Five paragraphs in, we finally get to my personal portfolio.  On the Wednesday after the election, I put in trades to buy coal, short solar and short Tesla.  The short Tesla trade is the only one that went through, which is ironic because I don’t even highlight it above.  Here are some reasons for the short:

  • Government subsidies account for something like $20k per car sold.
  • The stock is the definition of story stock – retained earnings are negative, there is no free cash flow (even when not accounting for subsidies), everything is based on growth.
  • The growth prospects are not that great.  The company has a history of creating frustrating delays with a focus on the perfection of features that have an immaterial impact on the utility of the car.  Additionally, competitors with decades more experience building and selling cars have started to create electric cars that match or exceed Tesla in quality.
  • The company recently acquired Elon Musk’s failing solar boondoggle in an episode possibly meant only to screw short-sellers.
  • Currently trades for 10x book, 4x sales and 87x operating cash flow.   Gross.
Despite all of this, the short will only be a small percentage of the portfolio and I will enforce a strict stop-loss if it falls 25% – story stocks have a way of going up beyond all logic.
Hack Wall St.
This portfolio is the current remnants of my first book (spoiler alert, it will be going on sale next week).  The theory behind ‘hacking wall street’ is to find special situation strategies that have a catalyst or otherwise function outside of the workings of wall street institutions.
At various check-in points, the portfolio has out-performed the market. Now, not-so-much.  The gold miners plus Silver Wheaton allocation hit about 30% of the portfolio and then was throttled by the election results.
The post-election consensus is that, with Trump as president, interest rates will rise. This has pushed down gold and silver prices.  Here’s how that works:
  1. The value of a currency, like everything else, is determined by its supply and demand.
  2. When the federal reserve increases the rate that it charges member banks, the banks lend less money.
  3. This hits both sides of the coin: there are fewer dollars being used so supply goes down and the interest rate goes up so there is more demand for dollars.  Thus, the value of the dollar increases.
  4. Because gold and silver have a so-called intrinsic value they are used as inflation hedges.  When there is inflation (the value of a currency falls) the gold and silver retains their value and their price goes up.
  5. When the market expects the value of the dollar to increase, the value of assets used to hedge against it falling go down.
Precious metal holders still have a few things working for us.  These steps aren’t always followed like clockwork – many times the interest rate changes aren’t enough to affect how Banks lend.  Additionally, the Fed has threatened to raise interest rates in the last nine or so quarters and done it exactly once.  We’ll hold our shares.
The Asset Allocation Portfolio

The function of the asset allocation portfolio (which was established in my newest book and then pinned down in an article on the site) is to diversify among non-correlated assets.  All assets get into bubbles that at some time or another must pop; by not focusing in one, the volatility and drawdowns in the portfolio are reduced, which in turn increase the likelihood of investors sticking with a strategy over time and not hunkering down into a sub 1% savings account.

Unfortunately for this newsletter, reporting the month-to-month results of the portfolio aren’t all that interesting.  The portfolio was hit by the same gold and silver decline described above and has also seen bad returns in its real estate positions.  This is likely also a function of interest rate fears – if interest rates increase, the cost of purchasing and holding real estate increases and the attractiveness of fixed income assets increases.
The Market Timing Portfolio

Here is where the excitement comes in.  We’re debuting an all-new portfolio this week and you can read about it here.

DIY Financial Advisor

I loved Wes Gray’s book with Tobias Carlyle: Quantitative Value. I have been thinking about becoming a financial advisor and have been fooling around with different asset allocation models.  Imagine my surprise and delight when I found out he had another book (with Jack Vogel and David Foulke) combining the three.

The book is a very easy read (especially when you skip over the all the studies/back testing) and the authors do a great job simplifying complex strategies and creating solutions for investors at various skill and risk levels.


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