It is time for my personal finance and investing journal update. Let’s update the State of my Stash.
If you are new to my blog, or this series of posts, I am tracking my liquid savings/marketable investments. These posts are sort of a finance and investing journal, so I can look back and see what I was thinking and (hopefully) how I achieved certain financial and savings goals. The primary benefit for me is to have a “forcing function” to make me drill down and see what’s going on.
CURRENT PORTFOLIO
First, we will run through an update on my investments. Including all of the accounts discussed below, my overall allocation is about 60% in stocks and 40% in bills.
Value Based Asset Allocation
In my largest account, I allow myself to allocate between 50% and 100% to stocks (equally split about 1/3rd each between equivalents of the ETFs: SPY, VXF, and EFA). I make these decisions based on valuation and expected future returns. This sort of “asset allocation” account is my largest and comprises over half of my total liquid investments.
Year-to-date in 2023, the account was allocated 30% in EFA and 15% each in VXF and SPY.
EFA was up 3.43% in Q2 and SPY and VXF were up 8.68% and 6.52%, respectively. Year-to-date, EFA is up 12.48%, SPY is up 16.79% and VXF is up 12.77%.
Practicing CAPITALISM
I’ve got about 20% in accounts where I actively pick stocks. This includes the “Fun Fund” account.
I’ve been doing some stuff. I still have my exposure to S.L. Green ($SLG), about which I believe I have previously written. I sold some of the common units to crystallize a tax loss (My cost basis was ~$40). I purchased some of the SLG-I preferred shares to maintain the exposure.
S.L. Green
An easy way for me to think about SLG is that One Vanderbilt and one of the large buildings on Park Ave are probably worth the entire current enterprise value. So, I get free options on their debt and preferred equity book (~$600MM) and equity in all of the other properties they own.
I think that they are more likely to do well than other players during a period of dislocation. People like to compare them and their balance sheet to other, more straightforward, real estate developers/hodlrs, but S.L. Green has their own lending/investment book, a special servicing division (which manages distressed assets/problem loans for other lenders), and they have started bringing in outside private capital in the “asset management” bidness.
Basically, they have set things up so that they have a lot of options. If their REIT equity is fairly priced, they can hold the equity on their own balance sheet like the other equity REITs, if not, they can do things with outside private or public capital via the asset management business. I think that they also get a lot of looks and hands on experience with assets and other real estate players via their debt/PE operation and the special servicing business.
The balance sheet looks a little weird, largely because they basically have a specialty merchant bank combined with an equity office REIT. It seems to me that in order to fairly compare it to the other balance sheets in the sector you need to back out the $600MM in the loan and preferred portfolio and a 2 -4 turns of related debt (essentially remove a BDC or a low leverage mortgage REIT). This complexity is going to keep a lot of investors away, which I view as a positive.
Now that SLG has completed their capital raise plans for 2023, I wouldn’t be shocked if they start talking about buybacks on the next quarterly call. I plan to selectively reinvest distributions.
My history/bias with $SLG is that I have been following them since before the 2009 Great Financial Crisis. At that time $SLG was perceived to be in trouble. They combined a bunch of distressed CLOs on their balance sheet with $AFR which was a sale-leaseback REIT focused on buying bank branches and offices, started by Nicholas Schorsch. $AFR was not a gem. As I recall, SLG smartly paired the CLOs with the cash flows from the bank branch leases and sales and this allowed time for them to recover…basically. They went and got Gordan Dugan from WPCarey to run it. This became Gramercy Property Trust. GPT was eventually sold to Blackstone. I also bought SLG during the covid crash and sold it for ~ a double. So I could be suffering from some historical biases here.
Capital Flight?
I recently bought some airlines: Spirit Airlines ($SAVE) and Southwest Airlines ($LUV). Airlines are super cheap on forward consensus estimates (or if you simply run the clock back to pre-covid earnings). There are seemingly good reasons for them to be cheap. For example, covid. What if that happens again in a few years? In addition, the current inflation they are facing (which probably also largely comes from covid-relief stimulus) makes the businesses seem challenged.
However, I think Buffett (or at least the reasoning that was attributed to him; he didn’t drop me a note) was probably right pre-covid. That is: the airline industry is now mature and/or has been completely captured by the regulatory apparatus. This will limit capacity, new entrants, and related capital, resulting in good returns on invested capital over the long term.
This is a similar scenario to that of the evolution of the railroad industry (although it seems unlikely that airlines will be as good as rails since they deal with consumers and regulators likely to be swayed by said public). Airlines should also benefit from long-term secular headwinds of increased travel.
Obvious risks are that the regulators and the public will not allow decent returns to airline capital and/or that management, labor, and/or suppliers (like Boeing) “take all the cookies.” For more, the people over at Primecap (managers of multiple mutual funds with good records) have published theses on the airline industry which I basically adopt/agree with.
I could not find an airline appearing to evidence enhanced alignment of equity with management (i.e., controlling shareholders, yuge management or founder equity stakes). I decided to favor $LUV, given the superior operational history and apparent differentiated bidness culture. I also personally believe they have a stronger brand affinity than most other airlines. People like knowing the type of plane they will fly on, the differentiated boarding procedures, not getting pinged on bag fees, etc… This would seemingly work better in a world with more consumer travel and less business travel.
I also purchased some $SAVE. The same general industry thesis applies (it no longer sucks), but this one also presents a “special situation.” JetBlue won a bidding war to acquire Spirit for about $32.35 per share in cash. A portion of the consideration is being paid via a monthly $.10 per share ticking fee. The government has opposed the merger.
The merger purchase price is over 100% above the price where I bought the stock. Obviously, the market is not handicapping a high probability of completion of the merger. There was another lower bidder, but I’m not sure in a scenario where the government prevails against JetBlue, the other bid is feasible. I suppose we’ll see.
In any case, I decided I was not paying much for the possible merger and $SAVE seemed pretty cheap anyway. I bought it basically where it was quoted before the merger interest moved the stock (and near where it traded during covid). I was also encouraged by how management handled the various merger offers. Together these are only about a 2% bet. I will probably add on weakness.
I think I’m also going to be looking into doing more “special situations” investing. I’ve had a fair bit of success in that arena. I also find it kind of fun. I can bring to bear some of my Derek Zoolander School, “kids who can read really really good” skills from being a detail nerd/attorney.
A Couple of Sales
Finally, I have also sold most of my Wells Fargo in various accounts. I caught about a double on most of the position, with dividends, but that was over ~3 years.
I also have seriously lightened up on my $BRK exposure. I caught a + ~30% on those purchases. I thought BRK is pretty close to fairly valued and see other cheaper stuff.
Some of the cash from these sales will have to fund distributions/expenses related to my growing family, but I am still holding sort of a higher level of cash after selling these positions. I plan to roll some of the Wells back into a certain regional bank that I’ve been thinking about buying for years. The regional was trading more cheaply than Wells when I sold but they’ve both run up a bit as I’ve messed around with lower bids.
VALUE + TREND
I also manage some of my portfolio based on a very simplistic, systematic trend and value strategy. This account is about 20% of my overall portfolio. I have ceased contributions to the account for the time being.
When long, the account is divided equally: 33% each to the S&P 500 (SPY), the Dow Jones Completion Index (VXF), and foreign stocks (VXUS). Basically, if the valuation of one of these indices/funds is rich (as determined by me, based on a somewhat discretionary “process”), then I apply a simple moving average trend-following rule.
The idea is to have some risk management in place when stocks are expensive by selling when they have negative time-series momentum (for example, when stocks are down over the last 12 months or below the long-term moving average).
When stocks aren’t expensive, I just want to be long and strong (so no trend-following). I only allow changes once a month in an effort to limit the number of “whipsaws”(when I sell and later buy back into the equity fund at a higher price than I sold, because the trend rule says so, resulting in a loss).
If you’re interested in learning more about trend following, I would recommend you start by searching for info on the Alpha Architect and Meb Faber sites. Jeremy Siegel also touched upon the subject of trend a little bit in Stocks for the Long Run.
As of 06/30/2023, this account was 100% long (33% in each SPY, VXF, and VXUS). However, the account was in t-bills/cash for the entire period in the first quarter. So, it is trailing the stock markets YTD.
For Q2 2023, this account was up 5.40%. YTD to June 30, it was up only .14%. The primary benchmark I’m using for this account is the $AOR ETF. AOR tracks a globally diversified version of a “60-40” portfolio. AOR was up 2.95% for Q2 2023 and 9.53% for the YTD through June 30.
I remain pretty pleased with the performance of this account.
STASH STATS
Now on to the balance update. As a reminder, I have dialed back my savings for this year. I am planning to ramp up spending with an expanded family. I also need to do some home improvements and buy a car. I’m hoping this spend will coincide with a bit of economic and price weakness, but that remains to be seen.
Coast Contributions
I am currently following a “Coast Financial Independence” plan (Coast Fi, likely for the next several years). If I work another ~20 years, assuming a 7% rate of return, my assets should double about 2 times. That would put me around $2mm. With some other assets like my deferred compensation/defined benefit annuity, social security, etc., I should be good to go. Hence, if I coast from here (and don’t save any more), I should be financially independent in 20 years.
At that time, I would be around the “normal” retirement age. I really do not like the prospect of working another 20 years, but that’s the plan for now. I need to ease off the gas for a bit. I am pretty sure I will ramp the savings back up in the future.
In any case, I’m not really just coasting. I am still planning on maxing my 401(k) and HSA. So, that means I’m currently saving/investing about $3000 monthly. I may have to further reduce the 401(k) contributions. First, I will see how this level of spendable income meets my needs.
Balance Update
I missed the update for the first quarter of 2023. As of December 31, 2022, investments were at about $437,000.
Since that date, I have continued to automatically save. Automating my savings is my strategy for managing my behavior (and limiting the willpower required to stay on plan). I save/pay myself first, then deal with the consequences in the rest of my budget.
I have been saving about $3,000 per month automatically into my relevant accounts. I will have some rather large withdrawals coming up to handle lumpy spending. But those did not yet hit.
The portfolio balance as of the end of Q2 2023 was about $470,000. Assuming I saved about $3,000 per month YTD, it seems the increase was about half due to savings and half due to investment appreciation.
HOW FAST IS My STASH GROWING?
In 2021, I started tracking the rate growth including both savings and investing gains (or…losses). This is an odd metric for most use cases, but it is easy to compute, and reflects both saving and investing (the two levers that I am trying to use here).
Thanks to an idea from a twitter friend (@DadInvest follow him if you don’t), I also started tracking the 5-year trailing CAGR for my total invested assets (this also includes both gains and contributions….Beardstown Ladies style).
First, my percentage increase in the stash from saving and investing for 2023 YTD was 7.5% (470-437/437). The five year trailing portfolio/savings CAGR is 21.99% (06/30/2018 to 06/30/2023). This 5 year CAGR is much lower than the almost 40% rate when I computed this at year end 2021.
THAT’S A WRAP
So, that’s the state of my stash. I’m not saving as much but thanks to the rally going on in the equity markets my portfolio increased decently.
Thanks for reading!