≡ Menu

A three pronged approach to portfolio risk management

No new trades this week.

music selection:  “Welcome To My Life” — Simple Plan

weigh-in:  196.8 (1.2) – back on track.

The best investors obsess about risk.  It is a quirk of mathematics that a 50% decline requires a 100% gain to break even.  So losses can hurt a lot more than gains help out.  Today, I am going to cover the three most important risk management tools for your portfolio.

Asset allocation:  Not enough is written about this topic.  Over long periods of time, it is more important to have the right mix of equity to bonds than it is to pick “good” stocks.  There is a growing chorus in the early retirement movement to go with a 100% stock allocation.  This to me, is foolish.  Without a buffer, sequence of returns risk can end an early retirement.  But there is another park of asset allocation that is equally important and that is diversification.  Most investors have a home country bias and invest too much in their own country and not enough abroad.  Similarly, within America investors gravitate towards local industries with Midwest Americans buying lots of heavy industry and West Coast Americans over allocating to tech names.  Having exposure to many different industries can reduce the volatility in a portfolio.

Position sizing:  Too many people put too much capital in a few high conviction ideas.  This is quite dangerous as the market has a way of humbling the mighty.  It is inadvisable to put more than 5% of your capital into any one ticker.  You can go a little higher with well diversified funds and ETFs.  This does not necessarily mean you must continually rebalance to maintain your position sizing.  There is a lot of research that indicates it is best to let your winners run (and to cut your losers early).  My next point will make clear when to sell.

Trailing stop losses:  The best way to protect yourself from catastrophic losses while allowing access to upside is to implement a strict trailing stop loss rule for your portfolio.  This lets you predetermine what your pain threshold is, thereby taking emotion out of the equation for determining when to sell.  You track the daily closing price of each of your positions watching for new highs.  Each time you notch a new high, you adjust the exit price accordingly.  I usually use a 25% trailing stop loss.  So if a stock rises to a new high of 100 dollars, my stop loss will be set at 75 dollars.  I likewise adjust my stop losses for dividends and other distributions received.  So, if a stock with an all time high of 105 has accumulated 5 dollars in distributions during my holding period, the 25% stop loss will still be 75 and not 78.75.  You can theoretically get to a stop loss of 0 this way.  And that is fine, a company that has paid distributions in excess of your cost basis is probably worth keeping through a crash.

Devour your prey raptors!

{ 4 comments }

Friday Fixed Income

New closed end funds.

music selection:  “Bitch Came Back” — Theory Of A Deadman

Each Friday, I explore options in the fixed income space.  When there are no attractive discounted corporate bonds available, I default to highlighting closed end funds invested in income and income like investments that are yield rich and trading at a significant discount to par.  I have two such investments today, plus an update on my limit orders for two discounted bonds that have yet to fill.

Multi-Market Income (MMT) is a closed end fund that seeks high current income through investment in bonds, non investment grade high yielding bonds, derivative securities and emerging markets.  It pays a managed distribution on a monthly basis.

  • Discount to NAV – 11.50%
  • Yield – 9.00%
  • Effective leverage – 17.36%
  • Expense ratio – 1.09%
  • Learn more

Advent Claymore Convertible Securities and Income (AGC) is a closed end fund that seeks total return through investments in global convertible and non convertible securities and utilizing and option writing strategy.  It pays an income only distribution on a monthly basis.

  • Discount to NAV – 10.94%
  • Yield – 9.89%
  • Effective leverage – 40.91%
  • Expense ratio – 3.48%
  • Learn more

I have limit orders open on two discounted bonds that I expect to be money good.  These are the Alliance One International (AOI) 9.875 coupon with 15JUL2021 maturity bond at 87 cents on the dollar and the CEC Entertainment (CEC) 8.000 coupon with 15FEB2022 maturity bond at 85 cents on the dollar.  AOI is currently trading at 93.9920 with an indicated yield to maturity of 16.45% and CEC is currently trading at 89.5000 with an indicated yield to maturity 14.43%.  If you are playing the “home game”, do NOT chase these bonds higher than my limit price.  Patience while stalking prey is the raptor way!

Devour your prey raptors!

{ 0 comments }

Bro, do you even lift?

A good workout.

music selection:  “In Too Deep” — Sum 41

waist-line: 38 inches

The gym finally added … two collars.  It’s not enough but should cut down on the number of people on an Easter Egg Hunt every damn workout.

I finally broke through the 55 pound plateau on over head press.  Just a month or so ago, I couldn’t do the 45 pound bar.  I’m happy with the progress, especially since my form is also improving with less excessive leaning back and less left/right tilt where one side goes up faster than the other.

Deadlift if coming along but it scares me a little bit.  I’m thinking of modifying the Strong Lifts 5×5 program by deloading and working with what I can lift 10 times before going up 5 instead of trying to be He-man.

I also finally broke through 75 on the bench press.  Eighty was not happening today though.  I’m close with three sets of 5 and two of 4 so there is hope I will complete before having to deload again.  Grip strength also seems to be improving.

Devour your prey raptors!

{ 0 comments }

Introducing TalkMarkets

Have you visited TalkMarkets?

music selection:  “One” — U2

weigh-in:  198.0 +1.4 – too much BBQ!

TalkMarkets (http://www.talkmarkets.com) is a new site covering the investment universe.  It is a little different than most.  This site aims to customize content to the investing sophistication of each user.  No more cookie cutter investment reading where everyone gets the same information.

TalkMarkets is also a social media site.  Everything is optimized to promote commenting, sharing, and connecting with others.  I’ve already connected with a few of my favorite bloggers.

I have joined TalkMarkets as a “Founding Contributor”.  You can see my finance related content mirrored there.  My profile page is located here.  I hope to generate new traffic and find a new audience.  The mission to educate and entertain when it comes to early retirement remains in force.  Hopefully, this will let me spread the message further.

Devour your prey raptors!

{ 3 comments }

Friday Fixed Income

Something a little different emanating from bond research.

music selection:  “I Think We’re Along Now” — Tiffany (tee-hee-hee)

On Friday’s I like to cover the fixed income investing universe.  My favorite way to invest here is by buying corporate high  yield bonds that are selling at a steep discount to par that I think will either mature or liquidate at a fair price.  I have made great money that way.  Better than with equities and options.  My second favorite, which has been the subject of many FFI posts; is to buy closed end funds with high yields that are trading at a discount to Net Asset Value (NAV.)  Today, I’m going to show you a third way to profit from bond research.  You see, the bond market is often called the “smart money”.  It is mostly institutional investors that have huge teams of analysts, attorneys, and expertise in multiple industries to help them evaluate a security.  Sometimes, a stock (the equity) will fall 50% or more while the same company’s bonds barely budge from trading around par.  Nine times out of ten or better, in the disagreement regarding the company’s future, the bond market has it right.  You can expect the equity of these beaten down companies that still have the faith of the bond community to double or better over the next 18 to 24 months.  It is important however to wait for an uptrend to establish itself.  I’m going to share three recent purchases I made that fit this description.

Acuity Brands (AYI) is a lighting and lighting solutions provider in North America.  It’s shares have fallen from a high around 277 to a low of 112 around April of this year.  Since then, shares have rallied to over 136.  Throughout the period the shares were tanking and continuing through today, the bonds always traded ABOVE par.  I bought shares at 133 and expect a double in the next 24 months.  The smart money will rarely steer you wrong.

Stericycle Inc (SRCL) provides regulated and compliance solutions to the healthcare, retail, and commercial businesses in the United States and internationally.  They are a major provider for removing and safely disposing of medical waste.  At the peak in October 2015, shares traded around 149 a share.  They bottomed at 58 or so a share.  An uptrend is in place that has seen shares over 70 and currently at 61.50 a share.  The company’s only bond matures in 2020 and continues to sell well above par despite a rising interest rate environment.  I purchased a synthetic long position at the 70 strike, taking a small credit for my trouble.  This is a company that provides a service required by regulation that is hard to replicate successfully. I expect to do very well here.

AMC Entertainment Holdings (AMC) through its subsidiaries, operates in the theatrical exhibition business. The company owns, operates, or has interests in theatres. As of December 31, 2017, it owned, operated, or had interests in 649 theatres with a total of 8,224 screens in the United States; and 365 theatres and 2,945 screens internationally.  The movie theater business has taken a hit in recent years as more people have switched to streaming services.  The industry is still hugely cash flow positive however.  Shares in this company traded as high as 35 dollars a share in December 2016.  By November of 2017 they bottomed around 11 a share.  An uptrend is in place that has shares trading at  17.23 a piece as of today.  The bonds trade just a few cents below par as they did when the stock was at its peak.  Clearly, bond investors (the smart money) feel there is nothing to fear.  I opened another synthetic long at the 20 strike, taking a credit of a little over 3 dollars a share for my trouble.  A double is a realistic goal for this investment.

Devour your prey raptors!

{ 6 comments }

Financial Transparency as of 31JUL2018

Each month, I break down my finances and financial progress.  This serves primarily to keep me accountable.  I hope it also helps others see the power of an income centric approach to early retirement investing.  Today’s report covers the month of July 2018 with year to date updates.

music selection:  “Love Walks In” — Van Halen

ASSETS:

Wells Fargo (taxable): This finished the month at 30,333, down from 29,851 at last month end.  That is a 1.61% monthly gain.  Year to date, this account is down 348 or 1.13%.

Interactive Brokers (taxable): Here I finished the month at 303,464 up from 290,093 last month.  That is a monthly gain of 4.61% and a year to date result of minus 6.29%.  The annualized loss is my first one in several years and is driven by the unexpected change in leverage at UVXY from 2x to 1.5x.  I was unprepared for the announcement.

Interactive Brokers (tIRA): This account is also up to 171,648, from 165,79 last month.  The monthly gain is 3.53% and my year to date result is a 5.28% gain.

Checking: Cash is a bright spot up to 11,880 from 11,535.  That is an even 3% growth from last month.  Year to date cash has changed by minus 1.11%

Total investable assets come to 521,122 up 4.06% from 500,772 last month.  That is a 4.06% monthly gain.  The year to date mark is minus 1.60%

Don’t forget to see the long term trend at Lizard King’s Transparency Page.

LIABILITIES:

Home: paid

Car: paid

Income tax: I have a 12,945 tax asset on deposit with the service.  Because of the mishap with UVXY, I expect to have a trivial tax liability this year and should even qualify for the maximum ACA subsidy.  Net tax rate could be negative for 2018.

WITHDRAWAL RATE:

I have automatic withdrawals from my taxable investing accounts set to provide a cash income of 25,000 a year.  Against a liquid net worth of 521,122, that is a withdrawal rate of 4.80%.  I earned 2,257 in options premium income during the month of July and am on pace to earn 40,326 in options for the year or 1.61 times budget.  Additionally, my income centric approach to investing includes 26,435 in expected distributions, dividends, and interest for the year or an additional 105.74% of budget.  In the event of a downtown, I should be immune to the need to “sell at the bottom”.  At the same time, I can expect steady and robust growth to keep ahead of inflation.

SPENDING:

Spending was 2,1551 for the month, which is a little rich for me.  We are in the thick of summer here in Houston and daily highs have been over 100F.  This has resulted in a higher than normal electric bill to keep the air conditioner running.  Year to date, I have spent 13,010 and am pacing 22,303 for the year.  That is 2,697 under budget.  I have an extraordinary item of 3,500 coming through next month as I have purchased a premium advisory product from Stansberry Research.

OTHER INCOME:

I earned 150 this month or 138.52 after payroll taxes for my efforts at the Memorial Hills UD municipal water board.  It is a small amount but over a year’s time it adds up to another full social security credit.  This should improve my eventual payout when I reach qualifying age.

Devour your prey raptors!


{ 5 comments }

Monday Trades LRCX, BX, TGT, KORS

Several positions expired over the weekend.

music selection:  “Treat Me Right” — Pat Benatar

weigh-in:  196.6 +0.8

I have four positions to roll forward today.  Those are Lam Research (LRCX), Blackstone (BX), Target (TGT), and Michael Kors (KORS).  Today’s trades average an expected yield of 22.72% and generate 1,094 in fresh premiums.

Lam Research (LRCX) is a diagonal call that could be working out better. After today’s new short call, I am down 1,958 in the trade.  I sold LRCX180907C00225000 for 40 cents a share.   The trade will be in force for 40 days and yields an expected annualized return of 2.81% against my cost basis of 129.80 a share.

Shares of Blackstone (BX) were called away over the weekend.  I am re-entering the trade with a cash secured put.  I sold BX180907P00035500 for 88 cents a share.  The trade will be in force for 40 days and yields an expected annualized return of 22.62% while enjoying 1.90% downside protection.

Puts in Target (TGT) expired out of the money over the weekend.  I am re-entering the trade at a higher strike.  I sold TGT180907P00080000 for 2.70 a share.  The trade will be in force for 40 days and yields an expected annualized return of 30.80% while enjoying 3.53% downside protection.

Finally, shares of Michael Kors (KORS) were assigned over the weekend.  I am writing covered calls against these shares for additional income.  I sold KORS180907C00068500 for 2.60 a share.  The trade will be in force for 40 days and  yields an expected annualized return of 34.64%.

Devour your prey raptors!

{ 2 comments }

Friday Fixed Income

More on discounted bonds.

music selection:  “Hello” — Lionel Richie

Each Friday, I explore investments in the fixed income space.  Having some reliable yield is essential to early retirees as a hedge against sequence of returns risk.  There is growing evidence supporting the use of a rising equity glidepath but I am not going to follow that just yet.  The yield curve is close to inverting and the bull market is setting longevity records.  I’ll save rising equity for after the next major correction.  This week, I’m going to update on my discounted bonds.

I bought the Revlon 15FEB2021 maturity 5.750 coupon bonds for between 75.50 and 77.00.  Those bonds have a yield to maturity in excess of 19%.  Price action has been flat with bonds closing Thursday at 77.000.

I bought the Monintronics 1APR2020 maturity 9.125 coupon bonds for 65.00.  The bonds have a yield to maturity of 44.796%.  There has been some price strength to 74.223 as of yesterday’s close giving me a 922.30 unrealized capital gain after less than a month.

I bought the Community Choice Financial 10MAY2019 maturity 10.750 coupon bond for 75.00.  These bonds have a yield to maturity of 53.454%.  Price action has also been strong with the bond trading at 82.820.  That produces a short term capital gain of 703.80.

I have two more bonds with good till canceled limit orders.  Those are Alliance One International 9.875 coupon 15JUL2021 maturity at 87.00.  That bond would have a yield to maturity of 16.382% if it were to fill today.  Also on watch, is CEC Entertainment with a GTC order at 85.00 for the 15FEB2022 maturity 8.000 coupon issue.  If it fills today, the yield to maturity would be 14.370%.

I’m a pretty strong believer in investing in discounted bonds when you have some degree of confidence the bond will not default or that you will have strong recovery in a reorganization or liquidation.  My worst bond of this group has an expected return over 14% while carrying less risk than equity.  You can retire very comfortably on those kind of returns.  The only trouble is good discounted bonds are hard to find now as there is some euphoria in the current pricing.  The credit cycle is certain to turn however and provide a large number of bargains.

Devour your prey raptors!

{ 2 comments }

Bro, do you even lift?

Missed a workout on Monday.

music selection:  “Layla (Unplugged Live)” — Eric Clapton

waist-line:  38 inches

I missed my normal Monday workout.  I had an … intestinal thing.  And I was concerned squatting might produce … leakage.  Don’t want to embarrass myself and get kicked out of the gym.  My gut is back to normal and I made it in today.  Squatted 140# with no trouble and feel like I can probably go 200 or more before I start failing.  Got through all five sets on the bench press without trouble.  Barbell row is becoming challenging as my grip doesn’t want to support that much weight.

There are still no new collars to be found.  Next week, I’ll corner the manager again and try to find out if I can speak to his supervisor.  It seems to me the ‘big boss’ is denying approval to cover the expense.

Next workout includes a deadlift.  I don’t enjoy that lift at all.  I need to watch the form videos again and get accustomed to doing it right.  And I need to improve my grip.  I did buy a pair of fingerless gloves so the bar doesn’t tear my hands up.  That seems to help me squeeze tighter.

I believe this marks 10 weeks of Strong Lifts 5×5 program.  So far, I like this better than anything I’ve tried.  And I can’t argue with the results that show when I wrap the measuring tape around my midsection.

Devour your prey raptors!

{ 2 comments }

Monday Options Trades

Seven positions expired over the weekend.

music selection:  “Misty Mountain Hop” — Led Zeppelin

weigh-in:  195.8 (2.8)

I have six covered call trades today and two written puts.  I wrote a total of 1,260 in premiums today.  That was mostly for August expiries so August option income is now projected to come it at 2,029.

First is a covered call in BrightHouse Financial (BHF).  This is a position that has disappointed and threatens to stop out on a 25% trailing stop loss.  I sold BHF180817C00050000 for 10 cents a share.  The expected annualized return is a mere 2.81%.  The trade will be in force for 26 days.

Scott’s Miracle Grow (SMG) is a position with a lot of potential.  The company is poised to dominate the indoor agriculture and recreational marijuana market by extension.  Shares have failed to impress since getting assigned some months ago.  Today, I sold SMG180817C00090000 for 55 cents a share.  The expected annualized return is 8.58%.  I am hopeful this one will still turn in a favorable quarter and recover.  The trade will be in force for 26 days.

ON Semiconductor (ON) is fairing much better.  I was narrowly assigned over the weekend after finishing a few pennies in the money.  I sold ON180817C00025000 for 53 cents a share.  The expected annualized return on this trade is an impressive 29.76%.  I expect to step in and out of this trade for however long it offers fat premiums. The trade will be in force for 26 days.

Match Group (MTCH) took a tumble some month’s ago when Facebook declared its intention to compete with the firm.  Shares have recovered somewhat since but are still down.  I sold MTCH180817C00046000 for 29 cents a share.  The expected annualized return from that trade is 8.85%.  The trade will be in force for 26 days.

Macquarie Infrastructure (MIC) was called away with a nice capital gain as the previous covered call was well out of the money.  I’m going back with a written put and to that end sold MIC180817C00045000 for 1.85 a share.  The expected annualized return is the best of today’s trades at an astounding 57.71%.  The trade will be in force for 26 days.

My short position in AMCX stopped out and I am replacing it with a written put in AbbVie (ABBV).  I sold ABBV180831P00090000 for 3.60 a share.  The expected annualized return is impressive at 36.50%.  The trade will be in force for 40 days.

It is time to roll my Skyworks diagonal call again.  The trade is down 22.62% against my cost basis and is threatening to stop out.  I sold SWKS180831C00108000 for 15 cents a share.  The expected annualized return against my cost basis of 63.70 is 2.15%.  Not encouraging.  The trade will be in force for 40 days.

Finally, Venator Materials (VNTR) stumbled and is trading well below what I consider intrinsic value.  Raptors who do not yet have a position might consider entering the trade at the 15 strike.  I sold VNTR180921C00017500 for 15 cents a share.  The trade will be in force for 61 days and yields an unappetizing expected annualized yield of 5.13%.

I did something a little unusual and bought a new long position without adding an options leg.  The position is CSI Compressco (CCLP).  The thesis is that the share price has fallen substantially while the market for the company’s bonds has held strong.  This is a powerful indicator that the stock might double in the next 18 to 24 months.  If I’m wrong and the stock trades sideways or even slightly down, I get paid 12.08% annually to wait from the MLP distribution.  This also replaces some lost passive income from MIC being called away and leaves me with interest, dividends, and distribution income sufficient to cover 111.18% of my 25,000 annual budget.  Not too shabby.

Devour your prey raptors!

{ 2 comments }