Who Is Buying All The Stocks? (Buybacks and Fund Flows)

I was recently researching two different but semi-related topics concerning demand for equities.  I was looking at fund flow information for all asset classes and found some unexpected information when I dove into the domestic equities.  I was also researching stock buybacks to better understand the demand that companies buying their own shares back might have on the overall demand for equities.  The results on both fronts were not really what I was expecting to find.

I keep finding myself thinking stocks, particularly US stocks, are expensive.  I look at a variety of metrics to make this determination (like price to earnings, price to cash flow, dividend yield, price to GDP, etc.).  As an extension of this research I also wanted to figure out what might be driving this over valuation (if in fact we are overvalued).  If demand is strong for a particular asset classes (ie money is flowing into it…and lots of it) then that could be driving the price of the asset class higher.

I recently reviewed fund flow information for equites (both domestic and world markets).  I expected to find a pretty even buying situation going on within both markets.  This is not what I found.  When I dove into the domestic versus the world markets the situation was even more unexpected.

More money has been flowing out of equities than in over the past few years in general.  Money has been almost always flowing out of equities in the past year.

US equities, however, have had almost no demand at all over the past few years.  The level of outflows has far exceeded the inflows.  In the last year there has been almost only selling of US equites.

World equities account for almost all of the inflows going into equities.  There has been almost no selling in world equities over the past few years.  Almost every period saw money flowing in and in the periods where there were outflows, they were very small.  The only time the outflows were large was in December 2018 but every asset class saw money flow out during that month.

Again, I was not expecting any of that.  Okay, so the overheated (potentially overvalued) US stock market is not being propelled by investor demand.  If anything with no additional capital flowing into the markets there should be really no impact on the valuations being driven by strong buying / investor demand.  This is not at all what I expected to find.  I figured with near record valuations almost across the board that investors would be buying up US stocks hand over fist.  That is what they always do!  FOMO!!!

Who else could be buying equities in large quantities?  The only other group would be companies themselves.  I started to pull together this information.  The easiest, most readily available information on this is compiled by Standard and Poor’s for the S&P 500 index stocks they track.  It shows us that US companies have been busy buying up their stock at a record pace in 2018.  If you read headlines on any newspaper you already knew that.  2018 saw S&P 500 companies buy back over $800 billion worth of their own stock.  That is a record high for buybacks in any year.

Comparing that ‘net inflow’ of money into domestic equities to the amount regular investors bought/sold and it looks like this.

As you can see the company share buybacks dwarf ‘the rest of us’ in every year for the past 4+ years.  You can also quickly see that the rest of us have been flowing money out of equities over the same time period (orange).  Companies are doing the exact opposite of what everyone else is doing and on a scale that is substantially higher (blue).  The yellow is to show how the rest of us are net buyers of world equities.

The S&P 500’s market cap is $21 trillion dollars and they just bought back a little over $800 billion in stock.  This is the equivalent of buying up almost 4% of the stock outstanding on the market.  That is a pretty decent bid and not inconsequential in terms of ‘investor demand’ that could be involved in causing the valuation levels of equities to reach extremely high levels (as they are right now).

Many questions come to mind!

• Can the buybacks continue? Sure, if rates are low companies will continue to borrow at low rates and buyback shares. Sure, if profitability continues to be near all time highs companies will continue to be able to reinvest their profits (and allocating some/most of it to reinvestments).  This automatic buying will keep stocks in demand and should keep prices moving upward (if the laws of supply and demand remain intact).
• What happens if/when stocks keep going up and ‘the rest of us’ start piling in? So if the general population has been on the sidelines and has not been buying stocks so far.  What would happen if they kept going up and all of the sudden FOMO kicks in and everyone tries to catch up?  Well that would be a ride up in stocks like few others in history.  Are you ready for that?
• But Debt?!?! Yes, most companies have increased their leverage (especially at the lower end of the market caps). Yes, they’ve used debt to finance the buybacks.  Yes, leverage in corporate balance sheets is at an all time high in relation to GDP (and climbing quickly).  Yes, the amount of debt that is nearly junk or covenant light is at an all time high and in a recession will just be an absolute mess.  That said, companies are running very high profit margins.  They are the most profitable they have been.  As long as that continues the debt levels are in no way out of whack.
• Isn’t this all just the FED pumping up a bubble in stocks? Hell no!  Are you crazy?!?!  Who told you that?!!?  Psycho perma-bear!
• Will this end poorly? Probably, because we’ve never had rates this low for this long. Every time this happens it usually does.  When the word ‘unprecedented’ keeps getting thrown around as much as it has in the past decade (and still is) when talking about monetary policy it means no one has a clue what we are doing.  So, expect good, expect bad, but don’t expect anything that you think will happen—to happen.
• Who can tell me what to do about all this? Good luck! You are on your own!  Sorry!

 

Surprises In Recent Asset Class Fund Flows (for me anyway)

NOTE: I pulled all this together a few weeks ago and just got around to posting (so June EOM info wasn’t ready yet).  I’ll update this regularly.

Fund flows information lets us know how money is flowing between different types of investment asset classes.  The information that is compiled on a weekly basis by the Investment Company Institute shows how money is flowing into and out of around 98% of ETFs and mutual funds.

We think it is great information to know (in addition to a lot of other information) to be able to get a sentiment of how money is 1) being allocated in real time, and 2) moving between different asset classes.  When you put this alongside other information we regularly review (like valuation levels, etc.) it can be pretty insightful.

So, here is the information we’ve compiled in the way we like to look at it along with our ‘probably worthless’ commentary.

One thing that completely surprised us was the equity flow information.  This was the reason we pulled all this together in the first place (but what we found was completely unexpected).  Very interesting.

The funds have been flowing out in general with the exception of bonds.  It generally looks like as the stock market started hitting new highs back in February 2018 that money started flowing out slightly.  This is not typical many times as markets begin to hit new highs money chases those returns as FOMO (fear of missing out) kicks in.  You can see that December 2018 had everyone dumping everything as the stock market had an absolutely abysmal month.  This is more typically what you see during times like this.  When the markets are getting rocked people sell.  This is generally the opposite of what should be done.  When you are crying you should be buying, and when you are yelling you should be selling.

This chart shows the flow of funds into all equity ETFs and mutual funds (it includes both domestic and world equities).  2017 saw money flowing into equities fairly steadily. 2018 saw almost no money flow into equities and mostly saw large amounts of money flowing out of equities.  This trend is continuing in early 2019.

When we breakout Domestic and World equity flows the story is pretty drastically different.  Money has been flowing out of domestic equities very steadily for the last 4 years.  There have been a few times in early 2017 when the domestic stock market was performing strongly that there were some inflows.  Other than that, the trend has been selling.  This is completely unexpected in our opinion.  Generally, when the market is climbing as it was in most of 2016 and 2017 people are piling money.  FOMO is a very real thing.  Then when things start reversing and going down people run for the exits.  Money has not been flowing in except during late 2016 and very early 2017 when the market was rocketing higher.  Completely unexpected.  If you look at the large price drawdowns in early 2018 and late 2018, you’ll see even more selling.  This is more in line with our expectations…where people do the exact wrong thing and sell when things are down.  Now, keep in mind just because this is what we expect to see doesn’t make it bad.  Our expectations are on seeing most investors do exactly the wrong thing almost all the time.  With the domestic stock market hitting all-time highs, and being fully/overvalued on a variety of metrics it is actually refreshing not to see everyone piling in hand over fist!  Without seeing these numbers on the page, I would have totally expected to see money flowing into equities.  Breaking things down to see the domestic versus the world was even more enlightening to see that the majority of money that is flowing into equities in not in domestic equities.

Money has been flowing into world equities even if it has not been flowing into the domestic stock market.  The biggest outflow was back in Dec 2018 (along with every other asset class).  We have a couple of observations on this.  As the world markets rose in 2017 money flowed in along with it.  This is pretty typical as people generally buy into rising markets (when the FOMO juices get flowing in their veins).  When the market started flatting out and going down the inflows stopped and reversed.  Again, this is typical because people don’t want to lose money so they sell.  We don’t agree that this is the way it is done but we don’t agree that this is the way it should be done.  Ha!  BUT what is very interesting is how this runs almost completely counter to what is happening in the domestic markets (where no money was flowing in basically at all).  What is causing this is anyone’s guess but our thoughts on this topic are that the domestic stock market has far outperformed the rest of the world over the past few years.  We believe domestic stocks are overvalued on a variety of measures.  The rest of the world’s stock markets are nowhere near as ‘out of whack’ as the domestic market is.  Many argue that the US deserves all of the overvaluation and is in fact not overvalued.  That remains to be seen.  Perhaps everyone is just investing in markets outside the US in order to invest at better values.  That is what we are doing for the most part so maybe we are not the only ones.

What a dismal, unloved, good for nothing asset class.  Whenever we talk to anyone about commodities all we get is bad news.  “They haven’t gone anywhere in over a decade…” “It costs too much to own them…” “They don’t provide any income so they aren’t investments…” “There is no demand for commodities so their price is just going to keep going down…” “The prices of commodities are rig/manipulated by [insert entity name here]…”  “No one wants to own commodities…” “You should buy stocks instead…”  Sounds good to us!  These are all very good reasons not to own commodities.  The more reasons there are that the masses don’t want to own commodities and the more unloved they are the better value we believe we are getting.  When commodity prices got clobbered in late 2015 and early 2016 there was a small amount of capital that flowed in.  Since that time nothing much has happened with either price/performance or money flows.  Unloved and nobody cares about them.  Sounds like the perfect place to build a position.  We own more commodities than we ever have in our lives and think they are good/decent value in relation to most financial assets right now.  We also think they will provide protection against inflation if it rears its ugly head!

The only asset class that has seen money consistently flowing into it over the past few years have been bonds.  The only real recent blip on the radar was around year end last year when ever asset classes was being sold off as the stock markets all dove to recent lows.  We don’t have a lot of commentary on bonds.  We hold a pretty decent amount of very short duration bonds.  We have no view on whether rates will rise or fall (although they have recently fell and we think that will continue if the Fed has to re-up QE to stave off a recession).  We hold bonds because we believe things are a little too out of whack and a bit too uncertain to be all in on stocks or commodities right now.  So, we view our bond position as dry powder in case something bad happens and not a bad alternative (with a decent yield that is very safe) to other financial assets right now.

MyMoneyTrainer Investment “Group” Update – June 2019 (Month 20)

 

MyMoneyTrainer Investment Group Scorecard_2019_06 (Month 20)

For full update download this ^^^ PDF.

Month In Review

Last month I was frustrated that Mr. Market was insane.  Mr. Market just made me mad this month!  So I started fighting back!  [blue and white face paint applied]

As I’ve recounted recently almost every position I own is trading near a 52 week low.  Which is weird since the market is pounding out a 52 week high?!? Deano = WINNING! Now I have a long term perspective and short term things like this don’t really bother me too much.  Not really…losing money is not fun…EVER! Regardless, I get that stocks (especially individual ones) will swing wildly at times for no real reason whatsoever. I’ve benefited from positive wild swings along the way and felt just fine about those wild swings.  But downside swings are much harder to digest. This is especially true when the strategy you are employing doesn’t seem to be working the way you think it should. This is exactly what is happening to me right now. But as I said to start with Mr. Market is insane.  He doesn’t care what I think!

There are a few stocks in my portfolio that I don’t want to own at all and I’d sell them if they were not absurdly undervalued.  In general I’m invested in some pretty unloved stocks and also in some pretty unloved sectors/industries. I see people post the best/worst returns for different classes/sectors/industries on Twitter and I feel like all my investments are at the bottom of every list.  UGH! If that doesn’t give you a vote of confidence that what you are doing is right I don’t know what will. Uh…no!

I feel like I’m taking less risk than being 100% in the market and I’m hanging with it pretty closely (and have at times been beating it).  I sleep well at night with my investment portfolio allocated the way it is right now. So I’m not in an emergency situation by any means but it has been a rough first 6 months of 2019.  The market has been rip roaring and my portfolio has not been. I had built up a good lead on it but have now fallen behind in the 20 months I’ve been tracking this. I’m not sure it is going to get much better either.  That said I don’t see many drastic changes coming in my portfolio unless/until something dramatic happens. I don’t really expect to make any major changes this month unless I find some stocks to purchase in sectors/industries that I have on my shopping lists.  So far nothing is turning up that is interesting to me. So I’ll stick with where I’m at with no major changes anticipated. But I am loaded for bear (bear markets that is) and I want to get out of bonds and into stocks. I’m sitting on some short term bonds and will deploy that money into stocks fully if I find something compelling.  I also have a large commodity position which I will lighten if I need to in order to purchase stocks. I’d love to be 100% stocks. I’m just not going to buy things that are overvalued and that provide no margin of safety. My portfolio has taught me that even with a margin of safety, no one knows what might happen and when the worst scenarios play out you’ll pay the price.

Anyway, this month I made a few small transactions.  They were fueled by anger! I’m trading mad!!!

Performance Update

My goal is to beat the stock market over time.  Why stocks? Because stocks have been an asset class that over long periods of time provide high real returns (inflation adjusted returns).  I measure myself against the US stock market (S&P 500) and the world wide stock market (VT a world wide ETF). I might not always be invested in 100% equities to accomplish my goal (although I’d much rather be).  So my strategy is to pick stock investments that are good deals and also to also shift classes a bit into (hopefully) better deals. So how is it going?

Current Month

	MyMoneyTrainer Investment “Group”	US Stock Market S&P 500 NAV (SPX5)	World Stock Market Vanguard World ETF NAV (VT)
This Month	4.59%	7.02%	6.47%

 

Yearly

Year	MyMoneyTrainer Investment “Group”	US Stock Market S&P 500 NAV (SPX5)	World Stock Market Vanguard World ETF NAV (VT)
2017*	8.30%	4.14%	3.48%
2018	1.28%	-4.75%	-9.68%
2019**	4.62%	18.30%	16.32%

* Since Inception Nov 1, 2017  ** Year To Date

Cumulative

	MyMoneyTrainer Investment “Group”	US Stock Market S&P 500 NAV (SPX5)	World Stock Market Vanguard World ETF NAV (VT)
Cumulative***	14.75%	17.35%	8.72%

*** Cumulative Nov. 1, 2017 – June 30, 2019 (20 Months)

Current Asset Class Allocation

• Stocks 52%
• Commodities 26%
• Bonds 21%
• Cash 1% 

I am not fully invested in stocks right now because I think:

• Stocks are overvalued on a variety of measures.  I’d love to be 100% stocks (and usually am). But the entire financial system is such an unprecedented mess that I feel like I need to diversify a bit and hope something works out!?!?
• Interest rates are distorted (low), the world is in massive debt, and the yield curve just inverted. I’m not sure how all that plays out but it is a lot of risk (that I don’t think is priced into stocks at/near an all time high).
• Commodities are cheap relative to financial assets and history.  I’m holding these as a hedge against inflation and because I believe they are a better value than stocks.
• I don’t want to take any duration risk.  I think rates will drop but I want money safe and sound when I want it to rotate back into stocks (regardless of what rates are doing).  So I’m in super short duration bonds and yielding just as good as longer duration bonds.

I could be right about all that and still get my pants beat off me (if everyone else determines none of that matters)!  I’m fine with that actually. I currently sleep very well at night. Generally, I think the world is a mess! So I’m going to hold a variety of asset classes in case weird things happen.  If any of the above changes drastically (and my bet it that it will…often) I will move money to and fro. My bond and commodity positions are dry powder that I hope to use to buy undervalued stocks (if they ever fall from these peaks).  If I find stocks that I believe are good values (both relatively and absolutely) I will buy them…and vice versa…

Of course with stocks punching out new all time highs my stocks should be doing well right?!?!  NO! Most of my individual stocks are pounding down near their 52 week lows. It is depressing to look at!  So when the market reverses course (if it does) my stocks should already be down and not go down any further!  Right! I’m not sure that is how it is going to work but one can hope.

Transactions This Month

Sold: BSCJ – Invesco Bulletshare 2019

Bought: TUSK – Mammoth Energy Services

Thinking: Trading Mad (Part 1) – The stocks I own have been no fun to own recently.  I’d describe most of them as ‘a mess’. My TUSK position has been an epic disaster since the start.  1) It is a cyclical stock that has been in the crosshairs of a horrible time in the industry overall.  2) The company has also been getting smaller since one of its subsidiaries has seen a lot of its business go away (in Puerto Rico hurricane rebuilding).  3) THEN, in early June, the Feds rolled in to investigate the company to see if they got the Puerto Rico business by bribing a government official in the first place.  For the record, when the Feds roll into a company you own; the stock generally doesn’t do all that well! Ha! Wait…not Ha!?!? The stock got chopped in half after already being chopped in half since I bought it in the first place (down over 80% since my initial investment).  Not one of my better days. Okay, so at this point, I’m just mad! The market has been rocking and rolling and my entire portfolio is filled with a bunch of numb nuts! That is no reason to get excited or to take any action, but I decided I was going to fight back! I truly believe the quote “when you are crying you should be buying, and when you are yelling you should be selling”.  I put on my blue and white face paint and let Mr. Market know that I don’t take his activities lightly! I reviewed TUSK again and decided that I still like the company and that it is absurdly cheap. Now, it is not absurdly cheap if the Feds find out that the whole place is filled with a bunch of criminals, but I don’t think that is the case. Their press release the day after the Wall Street journal article basically said the same (many layers of government bureaucracy reviewed every detail of their work/transaction).  Now, I don’t know for a fact that they did nothing wrong, but I have enough faith in my judgement to add to this investment based on what I know at this time. I decided to break one of my rules and add to a loser. I didn’t have a full position in this stock to begin with, so I added a bit to it (doubled down actually). If I am wrong, I won’t lose much more than I already have lost. If I am right, I will have gotten some very cheap shares in what looks like a decently run company. Time will tell if my anger with Mr. Market turns into a positive.

Sold: BSCJ – Invesco Bulletshare 2019

Bought: HA – Hawaiian Holdings

Thinking: Trading Mad (Part 2) – While I was in the mood, I looked at a few of my other undersized positions in accounts where I was sitting on some bonds.  I decided I wasn’t going to have any of that while I’m in this mood. I’ve been watching HA – Hawaiian Airlines for a while and decided to make this a larger position than it is in my current portfolio.  I’ve owned this stock awhile and it has had bad news left and right. I think it is a well-run company and decided to break my rule of adding to a position after the initial purchase and added to this position.  GRRR, Mr. Market!

Sold: NA

Bought: FCAU – Fiat Chrysler Auto

Thinking: Trading Mad (Part 3) – I normally reinvest dividends on most of my positions.  My brokerage account allows me to do this automatically for most stocks at no charge.  It generally doesn’t allow it on ADRs, like FCAU, so I have to decide if I want to do it myself.  Fiat paid a special dividend recently, so I must decide if I wanted to reinvest that income back into the stock.  They also paid their normal dividend (which I receive annually on the ADR) about the same time. I also have another ADR which paid its annual dividend as well (TX).  I decided to reinvest the dividends back into both stocks. I had to pay commissions on both these transactions which I’m not a huge fan of (obviously). I normally wouldn’t do this, but the dividend amounts were pretty sizable, and it will only be something I decide to do once a year for these two stocks.  I also think these stocks are still good values relative to other available investments right now. I would normally make this transaction anyway but hey…I was already mad as hell…so I decided why not!?!

Things I’m Working On Now

• Fund Flows Analysis – I did some research during the month which I’ll post later about fund flows.  I think this is important to keep track of. I was extremely surprised at what I found.  It has given me pause and makes me think we could see the market go much higher. This is a complete 180 from where I’ve been recently.  But I’m always ready to take in new information and change my mind!
• Find New Stocks To Invest In (Versus Bonds) – I am looking to do two things with this 1) find investments that are better than bonds and 2) find investments to replace some of my current ‘unwanted’ stocks that I currently hold in my portfolio.  I haven’t really found any that got me excited enough about fulfilling these 2 things to make me want to buy them. I continue to be disappointed by this. I am ready to deploy some money but Mr. Market can just keep pitching and I’ll keep not swinging for now I guess.

#investments #investing #stocks #cash #bonds #commodities #SP500 $SPX $SPY

Know Your History With Asset Class Returns, Interest Rates and Inflation!

Follow me on Twitter @MyMoneyTrainer 6/22/2019

This post in a PDF Know Your History With Asset Class Returns

The charts in this post in a PDF MyMoneyTrainer 45 Year Asset Class Overview

Reviewing different asset classes returns over long periods of times can give you important information and a sense of where things are (potentially) in current times.  Some years different asset classes all move together in one direction and other times they are all over the map.  No one really knows which way any particular asset class is going to move.  Many experts will try to convince you otherwise but, in the end, we are all just along for the ride with most all of this.  Nevertheless, it is interesting information to review and I think important information to review for a variety of reasons.

I don’t think you should try to use the information to time movements between different asset classes at all.  That said, the decision you make on how you allocate money between asset classes will likely have the largest determination of your actual returns over time.  Don’t screw this up!  If you were somehow able to time into and out of certain asset classes at precisely the correct times you would 1) possess a skill that only a handful of people on earth have ever developed successfully and 2) likely be a very lucky person.

This thought process mirrors the advice of the entire financial services industry.  It is advice given to the masses and is wise given that the masses don’t really devote a great deal of energy to their investing.  Most people are busy earning money and living their lives and their investing is ‘set it and forget it’.  That is just fine.  Reviewing asset class return information over long periods of times as we do suggest that this approach will likely work out just fine.

This brings me to what I believe the value in reviewing this information actually is—expectations.  Of course, past performance is no indication of future results.  You will hear this ‘cover their booty’ statement all the time whenever you are dealing with anyone in the financial industry who is responsible for investing.  It should be a great big red flag!  The people you are trusting with your investment dollars and who are likely feeing you to do this work evidently have little faith in their abilities.  They are basically saying ‘we think all this makes sense but who knows and don’t blame us if we are wrong’ which is weird if you think about it.  That said, past performance is likely the best indicator of what to expect in your future results over time.  If an asset class has been wildly volatile in the past it will likely be wildly volatile in the future.  If it has been a consistent but steady low returner in the past it will likely be that in the future.  Knowing what to expect, based on a long history of past performance, is good knowledge to have in your investing life.  The most important reason for knowing it is so that you can have good expectations on what you might expect in the future with your investments.  If you have no clue that stocks are volatile and swing wildly up and down and then they do just that it might scare you into making a bad decision related to your asset class allocation at precisely the wrong time.  Don’t do that!  My childhood hero GI Joe said ‘knowing is half the battle’ and he was right!

The other thing this knowledge can help you with is to see when things are out of whack.  A great example of this today is within the Cash and Cash Equivalents asset class.  For almost all of history this asset class has been a low return asset class and rarely if ever had negative returns.  The past decade however has produced near zero returns as the Central Banks have been using quantitative easing/stimulus to shake off the effects of the 2008 financial crisis.  This is out of whack…and I think important knowledge to have because of its impact on this asset class and others.

Two other super important things to know that are highly related to all these asset class returns is 1) inflation and 2) interest rates.  Looking at asset class return information without looking at these two data points is only one side of the picture.

Inflation is important to know because it provides you with what your real return is.  For example, the high returns (8%+) in the Cash and Cash Equivalent asset class back in the late 70’s and early 80’s are abnormally high and better than what riskier asset classes normally often earn.  But inflation during that time was also running about the same rates.  So even earning an abnormally high rate of return meant you were still just treading water (and maybe even losing ground).  Just looking at your bank statement might make you feel great with an abnormally high rate of return on this asset class.  But when you look at it versus inflation.  YIKES!

Interest rates are important to know because these rates dictate all kinds of things related to financial assets and are hugely important in determining their value and their expected long-term returns.  Those high interest rates back in the late 70’s and early 80’s dropping over the following 3 decades to 5,000-year lows.  That has produced an enormous bond bull market where you could earn the return of usually much riskier asset classes in the relative safety of bonds.  It has led to the valuations on stocks to rise because of the low cost of capital and comparative risk-free returns used in the value of future cash flows generated by the business.  Interest rates and their movement are the most important thing in what the value of (and subsequently what return you can expect) for all the asset classes.  News Flash…no one knows where rates are going!  That doesn’t stop people from opining on this topic and having very strong convictions on it and subsequently making big bets to match their convictions.  Some get it right fairly consistently, some get it right sometimes, many get it wrong a lot, and some never get it right.  Not one of them really knows what will happen with interest rates in the short term or long term.

I am an Enterprising Investor.  This is a term used by Ben Graham in The Intelligent Investor that describes a person who expends more energy than the average person in order to try to beat the average person.  This is me.  I spend a good deal of time thinking about and researching all kinds of things related to investing in hopes that I will be able to do better over a long period of time than the normal person.  I also do this because I enjoy doing it.  Looking at a bunch of charts, researching companies to invest in, and reading about investing is fun for me and a way to keep the old ticker noodling on something all the time.  I’m not a dummy but I also know I’m not as smart as many others out there in the investment world.  What does all this asset class return, inflation, interest rate stuff mean for an Enterprising Investor like me?

Do not try this at home!  Because I will probably lose all my money and be homeless because I don’t do what I’m ‘supposed to’ do.  I don’t listen to the typical advice about timing markets and all that.  Ain’t nobody got time for that?!?!  Ha!  I will frequently move money and invest new money into asset classes based on all the information I’m taking in. I will probably be wrong, and potentially really wrong.  This will cause me to lose money and potentially lots of money.  I might not actually lose money but I might just lose more or make less than I could normally (ie do worse on a relative basis).  This is no better.

Why would I do this? The main reason is so I can sleep will at night.  I have a decent temperament for investing for the long-term.  I don’t sweat it too much when things don’t go the way I think they will in the short-term (or even long-term).  I also never really stray too far in any direction.  I generally would prefer to be 100% allocated to equities over the long-term (which is all I have invested).  Equities are a great asset class to stay ahead of inflation and produce a real return (potentially the best/only asset class that does this).  If I stray too far from that the reason I’m doing it is I believe things are out of whack and that other asset classes are better for me to own to 1) sleep well at night, 2) get a good value for my investing dollars, and 3) keep an inflation hedge but also some dry powder or more liquid money for if/when stocks have a drawdown/disruption.

At this time, I am about as far away from my ‘normal’ allocation as I have ever been.  I’ve made most of this allocation swing since around February 2018.

My Normal Preferred Allocation:

• 100% Stocks

My Current Allocation:

• 50% Stocks
• 25% Bonds
• 25% Commodities

I’ve made this decision based in part on my review of asset class returns, inflation, and interest rates.  This is no recommendation at all for anyone reading this it is just where I sit currently based on all the things I look at.  It could change any day of the week (even wildly).  In practice I don’t make wild changes to this allocation because I have rules (my own) that I’d have to break to make a quick change in these allocations.  I have developed these rules to slow myself down and to let things play out as I’m making changes to my allocation over time.  Everyone’s allocation to different asset classes is their own decision.  The biggest reason my allocation is what it is today is because it allows me to sleep like a baby at night.  I feel like I am positioned decently for whatever comes (higher/lower inflation, higher/lower rates, stocks going up or stocks going down).  Depending on how things go I will do better or worse but I believe I have a decent allocation to not be caught on the wrong side of whatever comes.  I definitely have a scenario that I believe is most likely to happen and am positioned accordingly.  But if I am wrong, I won’t be sleeping under a bridge somewhere.  I hope anyway!  That is a really important consideration! Ha!

Just to give you an idea of how I translate all this information into my actual investment thesis / asset class allocation this is why I am allocated how I am today (and why I am not fully invested in stocks right now).  Again, just information and not a recommendation:

• Stocks are overvalued on a variety of measures. I’d love to be 100% stocks (and usually am). But the entire financial system is such an unprecedented mess that I feel like I need to diversify a bit and hope something works out!?!?
• Interest rates are distorted (low), the world is in massive debt, and the yield curve just inverted. I’m not sure how all that plays out but it is a lot of risk (that I don’t think is priced into stocks at/near an all-time high).
• Commodities are cheap relative to financial assets and history. I’m holding these as a hedge against inflation and because I believe they are a better value than stocks.
• I don’t want to take any duration risk. I think rates will drop but I want money safe and sound when I want it to rotate back into stocks (regardless of what rates are doing).  So, I’m in super short duration bonds and yielding just as good as longer duration bonds.

Over the years I’ve compiled information on asset class returns, inflation and interest rates for my own review.  I’ve tried to compile it into easy formats for me to review.  I’ve included the information here along with some completely unnecessary commentary of things I find weird.  I hope you find at least some of it helpful!  Enjoy!

All Asset Classes

I find this chart very interesting as it overlays each asset classes returns on top of each other (it doesn’t stack them).  This is valuable because it shows you sentiment of all asset classes in a particular year.  For example, in 2008 pretty much every single asset class was negative (and deeply so).

This chart overlays (not stacks) all asset class returns of the past 45 years on top of each other (also with a top/bottom view). #inflation #cash #bonds #stocks #realestate #commodities

Inflation

This chart shows inflation over the past 45 years. #inflation

Interest Rates

This chart shows the 3 Month T Bill return (risk free rate) over the past 45 years. #interestrates

Cash

This chart shows the Cash and Cash Equivalents asset class over the past 45 years. #cash

Bonds

This chart shows the Bonds / Fixed Income asset class over the past 45 years. #bonds $AGG $BND $SHV $VCIT $VCSH

US Stocks

This chart shows the US Stocks asset class over the past 45 years. #stocks $SPY #SPX $IVV $VOO $QQQ $IJH $VTV $IWF $IJR $IWM $VUG

International Stocks

This chart shows the International Stocks asset class over the past 45 years. #stocks $VTI $VEA $IEFA $VWO $EFA $IEMG

Real Estate / REITS

This chart shows the Real Estate / REITs asset class over the past 45 years. #realestate #REITs $VNQ $SCHH $IYR $XLRE $RWR $ICF $USRT $REM $FREL

Commodities

This chart shows the Commodities asset class over the past 45 years. #commodities $PDBC $DBC $GSG $DJP $GLD $IAU $SLV $USO $RJI

45 Year Asset Class Overview

This chart shows our 45 Year Asset Class Review. It is a lot of information crammed onto one page. #inflation #cash #bonds #stocks #realestate #commodities

MyMoneyTrainer Investment “Group” Update – May 2019 (Month 19)

MyMoneyTrainer Investment Group Scorecard_2019_05 (Month 19)

For full update download this ^^^ PDF.

Month In Review

Mr. Market is INSANE!  After several months of going straight up the stock market got walloped pretty good in the month of May.  I gained a little ground on the market (and I’m back to beating it) during the month but I should have gained much more than I did with the allocation I have (with only around 50% invested in actual stocks).  The problem with my portfolio is many of the stocks I own got absolutely obliterated during the month. Pretty much everything that could go wrong has gone wrong in my stock portfolio. Almost every position I own is trading near a 52 week low (and several are taking out their lows..yay?!?).  I literally only have two individual stocks that are trading in the middle of their 52 week range (Viacom and Prudential). All the rest are down in the doldrums! Yikes! My stocks did so poorly this month that I somehow was able to nearly match the S&P 500’s -6.4% loss while being only half in stocks.  The other half is in short bonds/commodities (split about evenly).

Now I have a long term perspective and short term things like this don’t really bother me too much.  Not really…losing money is not fun…EVER! Regardless, I get that stocks (especially individual ones) will swing wildly at times for no real reason whatsoever.  I’ve benefited from positive wild swings along the way and felt just fine about those wild swings. But downside swings are much harder to digest. This is especially true when the strategy you are employing doesn’t seem to be working the way you think it should.  This is exactly what is happening to me right now. But as I said to start with Mr. Market is insane. He doesn’t care what I think!

There are a few stocks in my portfolio that I don’t want to own at all and I’d sell them if they were not absurdly undervalued.  Watching those go further the wrong way makes me question holding them longer when I don’t even want to own them in the first place.  They were mistakes (and seem to be getting worse). Everything I’ve learned by tracking all this over the past 19 months can be chalked up to getting my degree in the University of Mr. Market.  I’ve made some good calls and some bad ones but I’ve learned from all of it. I’m smarter now than I was 19 months ago. 19 months from now I’ll probably be able to say the same thing. But in the end I don’t think any of the companies that I own are terrible investments or in risks of losing my capital (at least all of it).  I think most are still good investments. I don’t usually add to positions once I own them when they are down. This is to prevent me from catching a falling knife and pouring additional capital into a smoking hole. If I was wrong about an investment to start with who says I’m not still wrong about it? It is hard not to add to positions that are down however.  I might do this as I do my annual review on each position. I will only add to a position if I think it is a very compelling value. In general I’m invested in some pretty unloved stocks and also in some pretty unloved sectors/industries. I see people post the best/worst returns for different classes/sectors/industries and I feel like all my investments are at the bottom of every list.  UGH! If that doesn’t give you a vote of confidence that what you are doing is right I don’t know what will. Uh…no!

I am still beating the market (barely) over the 19 months I have been tracking this.  That is saying something I guess. I feel like I’m taking less risk than being 100% in the market.  I sleep well at night with my investment portfolio allocated the way it is right now. So I’m not in an emergency situation by any means but it has been a rough first 5 months of 2019.  I’m not sure it is going to get much better either. That said I don’t see many drastic changes coming in my portfolio unless/until something dramatic happens. I don’t really expect to make any changes this month unless I find some stocks to purchase in sectors/industries that I have on my shopping lists.  So far nothing is turning up that is interesting to me. So I’ll stick with where I’m at with no major changes anticipated. But I am loaded for bear (bear markets that is) and I want to get out of bonds and into stocks. I’m sitting on short term bonds and will deploy that money into stocks fully if I find something compelling.  I also have a large commodity position which I will lighten if I need to in order to purchase stocks. I’d love to be 100% stocks. I’m just not going to buy things that are overvalued and that provide no margin of safety. My portfolio has taught me that even with a margin of safety no one knows what might happen and when the worst scenarios play out you’ll pay the price.

Performance Update

My goal is to beat the stock market over time.  Why stocks? Because stocks have been an asset class that over long periods of time provide high real returns (inflation adjusted returns).  I measure myself against the US stock market (S&P 500) and the world wide stock market (VT a world wide ETF). I might not always be invested in 100% equities to accomplish my goal (although I’d much rather be).  So my strategy is to pick stock investments that are good deals and also to also shift classes a bit into (hopefully) better deals. So how is it going?

Current Month

	MyMoneyTrainer Investment “Group”	US Stock Market S&P 500 NAV (SPX5)	World Stock Market Vanguard World ETF NAV (VT)
This Month	-5.21%	-6.40%	-6.02%

Yearly

Year	MyMoneyTrainer Investment “Group”	US Stock Market S&P 500 NAV (SPX5)	World Stock Market Vanguard World ETF NAV (VT)
2017*	8.30%	4.14%	3.48%
2018	1.28%	-4.75%	-9.68%
2019**	0.03%	10.54%	9.25%

* Since Inception Nov 1, 2017  ** Year To Date

Cumulative

	MyMoneyTrainer Investment “Group”	US Stock Market S&P 500 NAV (SPX5)	World Stock Market Vanguard World ETF NAV (VT)
Cumulative***	9.71%	9.65%	2.11%

*** Cumulative Nov. 1, 2017 – May 31, 2019 (19 Months)

Current Asset Class Allocation

• Stocks 48%
• Commodities 26%
• Bonds 25%
• Cash 1%

I am not fully invested in stocks right now because I think:

• Stocks are overvalued on a variety of measures.  I’d love to be 100% stocks (and usually am). But the entire financial system is such an unprecedented mess that I feel like I need to diversify a bit and hope something works out!?!?
• Interest rates are distorted (low), the world is in massive debt, and the yield curve just inverted. I’m not sure how all that plays out but it is a lot of risk (that I don’t think is priced into stocks at/near an all time high).
• Commodities are cheap relative to financial assets and history.  I’m holding these as a hedge against inflation and because I believe they are a better value than stocks.
• I don’t want to take any duration risk.  I think rates will drop but I want money safe and sound when I want it to rotate back into stocks (regardless of what rates are doing).  So I’m in super short duration bonds and yielding just as good as longer duration bonds.

I could be right about all that and still get my pants beat off me (if everyone else determines none of that matters)!  I’m fine with that actually. I currently sleep very well at night. Generally, I think the world is a mess! So I’m going to hold a variety of asset classes in case weird things happen.  If any of the above changes drastically (and my bet it that it will…often) I will move money to and fro. My bond and commodity positions are dry powder that I hope to use to buy undervalued stocks (if they ever fall from these peaks).  If I find stocks that I believe are good values (both relatively and absolutely) I will buy them…and vice versa…

Of course with stocks punching out new all time highs my stocks should be doing well right?!?!  NO! Most of my individual stocks are pounding down near their 52 week lows. It is depressing to look at!  So when the market reverses course (if it does) my stocks should already be down and not go down any further!  Right! I’m not sure that is how it is going to work but one can hope.

Transactions This Month

Sold: TPRE – TPRE – Third Point Reinsurance

Bought: BSCJ – Invesco Bulletshare 2019

Thinking: Sell in May and go away?!?!  I should have done a lot more! But TPRE had a pretty decent run from the lows back in December (around $8.85) so I led off the first day of May selling out of this position at $11.75.  I had it on my list as a position that I didn’t want to own for a while. I didn’t want to unload it at an absurd low price and it provided me a decent uptick so I got out of it. If I had known what was coming this month I should have just sold my entire portfolio! Ha! Wait…not Ha!?!

Things I’m Working On Now

• Exercise – To be honest I’ve been focusing a good deal of time away from investing lately.  There is not really anything happening that needs my attention so I’m focusing on trimming up my waistline for a while.  I gotta get back into fighting weight for when there is blood in the streets! Ha!
• Looking At Stocks I’d Never Normally Look At – I’m looking at things I normally wouldn’t look at to make sure they are not things I need to be looking at.  Anti-confirmation bias!
• Rescreen / Find New Stocks To Invest In (Versus Bonds) – I am looking to do two things with this 1) find investments that are better than bonds and 2) find investments to replace some of my current ‘unwanted’ stocks that I currently hold in my portfolio.  I haven’t really found any that got me excited enough about fulfilling these 2 things to make me want to buy them. I continue to be disappointed by this. I am ready to deploy some money but Mr. Market can just keep pitching and I’ll keep not swinging for now I guess.
• Reading
  • Margin Of Safety – I’m currently reading Seth Klarman’s Margin Of Safety.  I’ve never read it before and am about 3/4 of the way through it.  I’ve underlined a good deal of passages so I think it is worth the time investment. I have had it on hold most of the past month however…because…
  • Podcasts – I’ve been catching up on a bunch of podcasts that I’ve been behind on.  I’m still getting caught up on all the old TIP episodes and listened to some great older ones recently.  I’ve also been listening to Tobias Carlisle’s new podcasts which has had some interesting guest on it.

#investments #investing #stocks #cash #bonds #commodities #SP500 $SPX $SPY