It is time for my personal finance journal update. The first one of the new decade!
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 the December update, I ended the month at about $256,000. I had some unusual spending in December, but stocks were roaring (especially foreign stocks EEM was up ~7.6% in one month).
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. In January this did not work in my favor. Emerging market stocks (EEM) declined (4.70%) Developed foreign stocks (EAFE index) were down (2.1%). The S&P 500 was flat.
I also manage a bit of my portfolio based on a little systematic, trend and value strategy. Despite this sell-off, the trend stuff is all long. I’m remain little lower in stock exposure in the value based strategy.
As I posted recently, I sold my BRX position. I have reinvested most of the proceeds of that sale. I bought some ViacomCBS and Wells Fargo. I am still looking at a few options for the remainder of the funds. As a reminder, this account is less than 10% of my total invested assets.
THIS MONTH
I ended the month at ~$260,000. Nothing crazy happened on the income front. My portfolio overall was essentially flat and then I added savings of about $3K.
Goals!
I recently established some goals for 2020. It is too early to report much progress (or lack thereof). I did, however, finish one of the books I am reading in parallel. The book is When Genius Failed by Roger Lowenstein. Here’s a link to the kindle version:
When Genius Failed is about the collapse of LTCM in the late 1990s. It was a pretty good retelling of the story (I was familiar going in). Buffett has talked about this a lot and there was some detail about his negotiations around taking over part of the portfolio. The interesting observations to me were: 1) markets are not log normal distributions and they can feed on the recent activity and totally reverse recent historical data including correlations; 2) part of what reportedly led to the demise of LTCM was the impact its strategy (and success) had on the markets; and 3) greed won out and the risks grew with success.
On point 2, the arbitrage trades that LTCM and its numerous imitators/competitors put on were gigantic in comparison to the true liquidity available. When the Russian financial crisis hit they all had to unwind the trades at once, largely due to the greed they employed by having huge amounts of leverage in play. This caused some weird things to happen such as spreads between bond yields on issues that must converge at some point in the future (such as new issue treasuries versus ones that were issued only 3 months prior) to blow-out beyond anything observed in the data. LTCM also started trading in areas other than arbitrage which seemingly was due to greed, at least told in the book. For example they started doing merger arbitrage, where they had no real edge, just because they had tons of AUM and wanted to keep compounding.
I do think this story could explain some of the recent activity in Tesla. For context Tesla was up like 40% in two days recently. I think one plausible explanation is there are some short seller funds who are blowing up or who other funds believe are at risk and they are bidding the stock up to try and get in front of some potential large forced buying due to margin calls or similar pressures. In LTCM some of their positions were going against LTCM (and others with the same trades on) by massive amounts every day because other traders were trying to profit (or just in front of) the potential massive buying that would be required if LTCM was liquidated. The trades pushed the market prices by large amounts because there was no liquidity on the buying side. This continued until LTCM got a large buyout from the banks.
There were also some interesting threads because Bear Stearns refused to participate in the bailout. Some stories/reports of the GFC indicate that the other banks remembered this when Bear was having a liquidity crisis in 2007/2008. All in all, I recommend the book, though it is pretty dated now.
ONWARD
So there’s the first update of the 2020’s. The market was down a bit, but my portfolio just seemed to tread water. I saved a bit of money, but I’m going to have to step it up to hit some of my goals. On the upside, I finished one book and I’m close to wrapping up another as I was reading them kind of in parallel (on on Kindle and one in print). Thanks for reading!