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Don’t Invest Like Stalin

I always try to read everything that Jeremy Grantham’s GMO publishes, but I somehow missed this one until it was republished on Meb Faber’s Idea Farm. Good stuff: Don’t Act Like Stalin.

Lot’s of good takeaways (as always). GMO’s main point was that chasing recent performance is a game you can’t win. All good strategies (and good managers) have periods of outperformance and underperformance.

But while chasing performance is a terrible move, so is sticking with a bad strategy or a strategy that is likely to be a lousy fit in a given macro environment (i.e. owning bonds in an inflationary environment or owning gold and commodities in a severe disinflationary environment).

This is where communication is important. Talk to your manager and ask them to explain their strategy. If it’s outperforming, ask them why. If they can’t explain it (or if they get excessively cocky about it), I’d question how sustainable the performance is. You might want to bank your profits and move on.

Likewise, if they’re having a bad year, ask them why. If they can’t explain it, they get overly defensive or their answer just doesn’t make sense, don’t hesitate to cut them loose. But if their strategy makes intuitive sense to you and it offers diversification alongside other strategies you’re running (that great alchemy of uncorrelated returns!), then give the manager a little leeway.

Not for the manager’s benefit, of course. His or her wellbeing is not your concern. But if you employed them for a reason (i.e. their strategy tends to zig while the rest of your portfolio zags) then you should hang on long enough to get the expected benefit.

As a case in point, Grantham and his team lost half their assets under management in the late 1990s when value lagged growth. But Gratham absolutely killed it in the years following the tech crash… and his former clients that bailed on him missed out.

 

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Prospect Capital’s Valuation Still In the Dumps

Prospect Capital’s (PSEC) latest earnings release didn’t do much to improve investor sentiment toward the stock. It remains mired in trading range and sits are barely 70% of book value.

PSEC has long been accused of being a little more aggressive than its peers in valuing its assets. But even so, at these levels it is safe to say that Prospect is trading at a deep discount to the value of its underlying portfolio.

We all know it’s a tough market for business development companies. Funding costs are rising at a time when yields on investment are falling due an glut of capital in the space.

So, here’s a novel idea for management: Halt all new investment and instead plow the proceeds into share repurchases. 

I’m not joking. Prospect shares yield 11% at current prices, which is about in line with its new originations. But it also trades at a 28% discount to book value and is diversified. So why accept the risk of a new origination if you can simply reinvest in your own shares and be done?

 

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Take Your Losses Early and Often

With market volatility picking up this past week, now is as good a time as any to review why it’s important to take your losses early.

Portfolio LossGain Required to Break Even
(10%)11%
(20%)25%
(30%)43%
(40%)67%
(50%)100%
(60%)150%
(70%)233%
(80%)400%
(90%)900%
(97%)3,233%

If you lose 10%-20% in a trade, it’s not that hard to recover. It only takes 11% – 25% to get back to where you started.

But if you lose 50%, you need 100% returns to get back to break even. Or if you lose 97% — as Bill Ackman recently did in Valeant Pharmaceuticals — you’d need a ridiculous 3,233% on your next trade just to get back to zero.

I have a select few stocks in my portfolio that I’m truly willing to buy and hold, tolerating whatever volatility the market throws at me. As an example, I own some shares of Realty Income (O) that I will never sell. I’m reinvesting the dividends and letting them compound, and I’m willing to sit through a significant drawdown.

But for the lion’s share of my portfolio, I take my losses early. I’ve taken enough losses over the years to learn that lesson the hard way…

 

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Where to Park Your Money in 2018: Adding Alternatives

The following is an excerpt from The 5 Best Investments You Can Make in 2018, originally published in Kiplingers.

The stock market is the biggest wealth creation machine in human history, and that’s not hyperbole. Stocks give you a little piece of the U.S. economy. So if you’re bullish on America’s long-term future, you’re bullish on the stock market.

But while the stock market might be the best place to park your money over an investing lifetime, it’s not necessarily the best home for it at all times. Consider that from 1968 to 1981, the Dow Jones Industrial Average was flat, not earning a single red cent. In inflation-adjusted terms, they actually lost money. But commodities and gold performed fantastically in those years. From 1971 to 1980, the price of an ounce of gold exploded by more than 2,000%.

The lesson here is not necessarily to buy gold but rather to diversify. Have some portion of your wealth in alternatives that aren’t tightly correlated to the market. That can include anything from precious metals and artwork to rental real estate and even actively managed strategies that zig when the market zags.

“The inclusion of an alternative investment in a portfolio is a form of insurance,” says Endre Dobozy, manager of FTM Limited, a firm specializing in low-volatility alternative investments. “As the global financial crisis illustrated, equites remain diversified until they aren’t. By including an alternate investment in your portfolio that has little to no correlation to the market, you are able to offset a portion of any market losses and reduce the overall drawdown of your portfolio.”

The alternatives space is less regulated than traditional asset classes such as stocks and bonds, so you must do a little extra due diligence here. And never invest in something you don’t understand. But adding alternatives to your portfolio, if done right, can be that magic elixir of higher returns with less risk.

To read the full article, see The 5 Best Investments You Can Make in 2018.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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If You’re Worried About a Crash, You Might Want To Sell These…

The following is an excerpt from 7 Stocks to Sell Before the Crash – And Tesla is #1!

It’s been years since we’ve had a proper stock market crash. And while that doesn’t necessarily mean that you should be looking for stocks to sell because a crash is imminent, now’s not a bad time to think about which companies face the biggest risks.

In a bear market, the weakest companies with the flimsiest business models the ones to get hit the hardest. This is particularly true of corporations that need regular cash infusions from secondary stock offerings.

A falling stock price raises the cost of capital, and becomes something of a vicious cycle. Stock declines force greater shareholder dilution as the company issues more shares to bring in a fixed amount of capital. Then the stock heads even lower, and… well… you get the point.

Today, we’re going to take a look at seven stocks to sell, that I see as particularly at risk to a bear-market mauling. You don’t necessarily have to scramble to dump them immediately, of course; some might even be decent short-term trades.

Just don’t get attached. Once the market eventually rolls over, these companies will likely be some of the hardest hit. And you don’t want to be left holding that bag.

Tesla Motors (TSLA)

I really hate including Tesla Motors (TSLA) on this list because I admire founder Elon Musk and I really like his product. The world will be a better and greener place for Mr. Musk’s efforts.

But I wouldn’t touch the stock with a 10-foot pole.

Tesla Inc operates in a hypercompetitive industry, and has no enduring competitive advantage in producing electric cars. Virtually every major automaker either already has or is developing a high-end electric car to compete with TSLA stock. Earlier this year, for instance, Volvo announced that in 2019 all of its new cars will be either electric or hybrid. This follows an announcement by Porsche to do the same inside of 10 years. And even mass-market Volkswagen AG (VLKAY) plans to make at least 25% of its cars hybrid or electric.

These are established players that have been around for decades. Tesla is still an upstart that has yet to turn a profit Despite growing its revenues at an impressive clip, Tesla has never come close to earning a profit. And there is no light at the end of the tunnel here; profit projections are murky at best.

Investors will continue to feed Tesla capital… right until they don’t. You don’t want to own Tesla stock when that day comes.

To read the rest of this article, please see 7 Stocks to Sell Before the Crash – And Tesla is #1!

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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