It is time, yet again, for the monthly airing of my private financial laundry. May was all about Mr. Market opening a “can of whoop-ass” on my portfolio.
All of the prior updates in this series are available on the Savings Diary page. The first, I’m Just Saving…Personal Finance Diary kind of provides the “origins story.”
Prior Update
In April, the S&P 500 was up about 4%, with emerging markets stocks up about 2.1% and foreign developed (EAFE) up about 2.8%. I benefitted from a strong tailwind from the market and ended up with about $206,000 in liquid investments. [But that was April.]
Current Portfolio
I remain “overweight” foreign stocks. See Media Pin of the Week – More GMO, Weekly Media Pin – Grantham on Graham, Best Foreign Value Factor ETFs, Resource Roundup: More CAPE, and Foreign Value Factor ETFs Update.
Overall, about 50% of my overall portfolio is allocated to non-U.S. domiciled stocks. (I suppose that is only a relative overweight). I also manage a bit of my portfolio based on a little systematic, trend strategy. Excluding this “trend allocation”, I’m only actively stock picking (including value tilt and other factor allocations) in about 10% of my portfolio.
I am, however, getting close to starting the Tesla Tithe now that they raised capital (pretty much as I predicted, though I thought they should do it after printing a good couple of quarters; seems they may have waited a bit too long). I am now just waiting until the negative momentum dissipates (if it does) before pulling the trigger.
I also bought some more Series I savings bonds in May locking in a .50% fixed, estimated real rate. I have discussed I-bonds previously here and here. I use them as a hybrid emergency fund/bond allocation.
I’m not an Alpha I just Berk-a-lot
Finally, I bought some BRK in an account I manage for a relative (but not for myself yet). The main reason I mention this is that I kind of discussed buying BRK in Is 2019 Berkshire Too Big to Succeed.
I continue to mulled that topic over and intend to go back and revise that post to include a reference to AQR’s paper which examined a regression of Berkshire’s historical performance with some common factors that purport to explain (at least they correlated with) the historical performance of BRK.
Basically the factors were: 1) carry (because of the leverage from float and other sources), 2) quality (AQR’s QMJ), and 3)low beta/volatility (AQR’s BAB factor).
The whole point of my prior post was sort of if you believe this at all or if you believe he has some Alpha (I do….even the paper doesn’t explain all of the returns)…the “carry”/structure of Berkshire was likely a huge factor. So even if you take away the alpha going forward (or the factors stop working/he fully arbitraged them) you would still have carry + normal beta (and here the beta could probably also be private equity market returns too…so basically the equity risk premium) until you get to some theoretical massive limit. I think BRK would shrink “hugley” way before that happened. The carry is particularly good when it is 1.4x – 1.7x (per the AQR paper) non-callable, or at least uncorrelated and the interest rate is below t-bills (and often negative)!
Ok this digression must end. I might as well link the paper now that I’ve pretty much covered the point.
This Month
In May, I had no special saving contributions or unusual spending. As I recently discussed, my savings rate is currently about 55%. As I’ve said, I generally try to automate as much as possible. I usually check in on the savings rate figure every few months. So, I added about $3,000 to my liquid securities accounts based on my automated saving program.
Despite my hard work and automated savings, my “stash” declined in May to $201,000.
So my $3,000 in new contributions (plus about $5,000 more) were offset by the moves of Mr. Market. I suppose he giveth and he taketh. I think that means my portfolio declined by about 4%. It is sort of cold comfort, but the S&P 500 was down about 6.4% in May.
It looks like the EAFE was down 4.8% and emerging markets were down 7.3%. My relative outperformance versus the SPY was likely due to a greater allocation to (cheaper) EAFE stocks, the outperformance of value stocks last month, and the fact that I have some bonds (mostly due to the trend/tactical allocation).
Onward
To sum up….OOOOF! All that work and savings for nothing. Oh well, nothing ventured, nothing gained. I’m sure it is just a blip compared to what the future will hold from time to time.
After all, as Charlie Munger has said, “[Y]ou can argue that if you’re not willing to react with equanimity to a market price decline of 50%, two or three times a century, you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get, compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.” (BBC interview, 2009)