Don’t Invest Like Stalin

I always try to read everything that Jeremy Grantham’s GMO publishes, but I somehow missed this one until it was republished on Meb Faber’s Idea Farm. Good stuff: Don’t Act Like Stalin.

Lot’s of good takeaways (as always). GMO’s main point was that chasing recent performance is a game you can’t win. All good strategies (and good managers) have periods of outperformance and underperformance.

But while chasing performance is a terrible move, so is sticking with a bad strategy or a strategy that is likely to be a lousy fit in a given macro environment (i.e. owning bonds in an inflationary environment or owning gold and commodities in a severe disinflationary environment).

This is where communication is important. Talk to your manager and ask them to explain their strategy. If it’s outperforming, ask them why. If they can’t explain it (or if they get excessively cocky about it), I’d question how sustainable the performance is. You might want to bank your profits and move on.

Likewise, if they’re having a bad year, ask them why. If they can’t explain it, they get overly defensive or their answer just doesn’t make sense, don’t hesitate to cut them loose. But if their strategy makes intuitive sense to you and it offers diversification alongside other strategies you’re running (that great alchemy of uncorrelated returns!), then give the manager a little leeway.

Not for the manager’s benefit, of course. His or her wellbeing is not your concern. But if you employed them for a reason (i.e. their strategy tends to zig while the rest of your portfolio zags) then you should hang on long enough to get the expected benefit.

As a case in point, Grantham and his team lost half their assets under management in the late 1990s when value lagged growth. But Gratham absolutely killed it in the years following the tech crash… and his former clients that bailed on him missed out.



This article first appeared on Sizemore Insights as Don’t Invest Like Stalin

Prospect Capital’s Valuation Still In the Dumps

Prospect Capital’s (PSEC) latest earnings release didn’t do much to improve investor sentiment toward the stock. It remains mired in trading range and sits are barely 70% of book value.

PSEC has long been accused of being a little more aggressive than its peers in valuing its assets. But even so, at these levels it is safe to say that Prospect is trading at a deep discount to the value of its underlying portfolio.

We all know it’s a tough market for business development companies. Funding costs are rising at a time when yields on investment are falling due an glut of capital in the space.

So, here’s a novel idea for management: Halt all new investment and instead plow the proceeds into share repurchases. 

I’m not joking. Prospect shares yield 11% at current prices, which is about in line with its new originations. But it also trades at a 28% discount to book value and is diversified. So why accept the risk of a new origination if you can simply reinvest in your own shares and be done?



This article first appeared on Sizemore Insights as Prospect Capital’s Valuation Still In the Dumps

LyondellBasell: THIS Is What Buybacks Are Supposed to Look Like

Stock buybacks get a bad reputation — and justifiably so. It seems that for most companaies, a share repurchase is little more than an expensive mop to soak up share dilution from executive stock options or other share-based compensation.

So, it’s refreshing to see a company like LyondellBasell Industries (LYB). When Lyondell announces a share buyback, they mean it. The company has reduced its share count by about 10% per year for the past three years while also raising its dividend by nearly 20% per year.

That’s a company that takes care of its shareholders.

I recently added LyondellBasel to my Dividend Growth portfolio.

Disclosures: Long LYB

This article first appeared on Sizemore Insights as LyondellBasell: THIS Is What Buybacks Are Supposed to Look Like

Take Your Losses Early and Often

With market volatility picking up this past week, now is as good a time as any to review why it’s important to take your losses early.

Portfolio LossGain Required to Break Even

If you lose 10%-20% in a trade, it’s not that hard to recover. It only takes 11% – 25% to get back to where you started.

But if you lose 50%, you need 100% returns to get back to break even. Or if you lose 97% — as Bill Ackman recently did in Valeant Pharmaceuticals — you’d need a ridiculous 3,233% on your next trade just to get back to zero.

I have a select few stocks in my portfolio that I’m truly willing to buy and hold, tolerating whatever volatility the market throws at me. As an example, I own some shares of Realty Income (O) that I will never sell. I’m reinvesting the dividends and letting them compound, and I’m willing to sit through a significant drawdown.

But for the lion’s share of my portfolio, I take my losses early. I’ve taken enough losses over the years to learn that lesson the hard way…



This article first appeared on Sizemore Insights as Take Your Losses Early and Often

Looking Beyond the 60/40 Portfolio in an Era of Low Returns

I wrote earlier this year that the 60/40 portfolio is dead. Well, rumors of its death were not greatly exaggerated. The 60/40 portfolio that served retired investors so well over the past 30 years is gone… and it’s not coming back any time soon. As investors, we have to move on.

Rest in Peace 60/40 Portfolio


While it’s true that a simple 60/40 portfolio of the SPDR S&P 500 ETF (SPY) and the iShares Core US Aggregate Bond ETF (AGG) is actually enjoying a nice run in 2016, up a little more than 3% for the year, don’t get used to it. The math simply doesn’t work out going forward.

Let’s play with the numbers. Back in 1980, the 10-year Treasury yielded a fat 11.1%, and stocks sported an earnings yield (calculated as earnings / price, or the P/E ratio turned upside down) of 13.5%. This implied a back-of-the-envelope portfolio return of about 12.5% per year going forward, and for much of the 1980s and 1990s that proved to be a conservative estimate. Both stocks and bonds were priced to deliver stellar returns, and both most certainly did.

But what about today? The 10-year Treasury yields a pathetic 1.6% and the S&P 500 trades at an earnings yield of just 4%. That gives you a blended portfolio expected return of an almost embarrassing 2.8%. [Note: The usual disclaimers apply here. These are not intended to be precise market forecasts.]

You know the refrain: past performance is no guarantee of future results. There is no guarantee, at least with respect to stocks, that expensive assets can’t get even more expensive. It’s possible that the great bull run in stocks could continue indefinitely, however unlikely it might be.

But I can’t say the same for bonds. Starting at a 1.6% yield to maturity (or even the 4% you might find on a mid-grade corporate bond) you cannot have returns going forward that are anything close to the returns of the past several decades. Bond yields would have to go negative, and I don’t mean the (0.15%) we see today on the Japanese 10-year bond. I’m talking (5%) or (10%) or even more.

That’s not going to happen. Or if somehow it did — if investors got so petrified that they piled into bonds to the extent that yields went negative to that degree — then I would assume the stock portion of your portfolio effectively fell to zero at that point.

The bottom line here is that even under the most optimistic scenario, investors are looking at disappointing returns in a standard 60/40 portfolio.

So, what are investors supposed to do about it? They can’t just stuff their cash in a mattress for the next 5-10 years. Most of us actually need to earn a return on our money.

I’d offer the following suggestions:

Consider taking a more active approach to investing.

To the extent you invest in traditional stocks and bonds, don’t be a buy and hold index investor. Yes, low fees are great. But the fact that you paid Vanguard only 0.09% per year in management fees won’t really matter if you’re returns are still close to zero.

Instead, try a more active strategy, perhaps focusing on value or momentum. Or perhaps try a dividend focused strategy. With a dividend strategy, you can realize a cash return even if the market goes nowhere for years at a time.

Consider investing outside of the market.

If you’re willing to get your hands dirty, consider starting your own business or investing in a cash flowing rental property. Yes, there is more work involved, and there is the risk of failure. But there is also risk in trusting your savings to a fickle market when both stocks and bonds are both expensive by historical standards.

Consider a truly alternative asset allocation.

This final point is really my specialty. To the extent I can, I am eliminating traditional bonds from the portfolios of most of my clients and replacing them with non-correlated (or at least minimally-correlated) alternative investments. A standard 60/40 stock / bond portfolio might instead become a 50/50 dividend stocks / alternative investments portfolio.

Alternative investments” is a generic term that can mean just about anything. In practice, for me it has meant a combination of long/short strategies, options writing strategies, absolute return hedge funds, and liquid alternative portfolios.

Will a non-traditional portfolio like this outperform over time?

Frankly, I don’t know. No one does. We’ve never seen a market like today’s.

But to me, it’s the only move that makes sense. Taking the traditional path is a virtual guarantee of disappointment. Incorporating alternatives into the portfolio at least give us the potential for solid returns.

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital, an investments firm in Dallas, Texas.

Photo credit: Pheonix149

In Defense of Hedge Funds…


Photo credit: Sean Davis

Hedge funds don’t get a lot of love these days. They’ve underperformed for years, and their fees — the standard is 2% of assets and 20% of profits — make them a pariah in the age of indexing and low-cost robo advisors.

Hey, I get it. The high fees and lousy performance of competing hedge funds was a major reason that I started a liquid alternative robo advisor with my partner, Dr. Phillip Guerra. We run a suite of risk parity portfolios that hold their own against comparable hedge funds… and we do it at a fraction of their fees.

Yet let’s not throw out the baby with the bathwater. While many — perhaps most — hedge funds add no real value and certainly don’t justify their fees, there are plenty of hedge funds that absolutely do add value and deserve every last cent. But how do you separate the wheat from the chaff?

Ask yourself the following questions:

Does the fund do something unique that realistically cannot be replicated in a cheaper and more transparent vehicle, such as an ETF, mutual fund or managed account?

Really dig deep here. If the fund is a long-only large cap fund, you should be skeptical as to whether the hedge fund structure is necessary. If the fund employs sophisticated hedges that would be hard to implement in a smaller managed account, then the hedge fund structure is probably justified.

Does the fund deal in illiquid securities that would justify the lack of liquidity of the fund itself?

Years ago, a hedge fund in the DFW area made a fortune buying idled planes from the major airlines. Needless to say, that sort of thing would be impossible to replicate in a mutual fund, ETF or managed account. It’s virtually impossible (or at least impractical) to securitize an airplane. On a similar note, in the past I have placed accredited investor clients in a fund that finances medical accounts receivable that might take two years or more to pay off. It’s hard to see a strategy like that working in a mutual fund that promises daily liquidity.

Does the fund have a strategy that would be fundamentally undermined by investor redemptions?

Think about corporate raiders like Daniel Loeb or Carl Icahn. These guys are known for amassing massive stakes in companies and then using their clout to force change, including booting out management that is underperforming. That only works if you have a stable pool of capital. Imagine Loeb attempting to take over a company and then having to back away with his tail tucked between his legs because he had a wave of shareholder redemptions.

When your advisor pitches you a hedge fund, you shouldn’t necessarily recoil in horror. I regularly incorporate hedge funds into the portfolios of my accredited investor clients when they fill a specific niche I’m trying to fill. And to date (knock on wood), I have yet to have a major disappointment on this front. I’ve lost plenty of money for myself and clients in low-cost ETFs and mutual funds, though I’ve never lost money (again, knock on wood) investing in a good alternative manager or hedge fund. I probably will at some point. You know the drill, past performance is no guarantee of future results. But I can credibly say that it hasn’t happened yet.

Before you invest a single red cent in a hedge fund, ask yourself the questions above. Hedge funds are certainly not for everyone, but if utilized correctly they can reduce portfolio volatility without sacrificing returns.

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital, an investments firm in Dallas, Texas.

This article first appeared on Sizemore Insights as In Defense of Hedge Funds…

Why Dividends Matter

Feel free to use this image, just link to www.SeniorLiving.Org
Photo credit: www.SeniorLiving.Org

I like getting paid in cold, hard cash. And frankly, who doesn’t?

But stock dividends are more than just a quarterly paycheck. They are a way of doing things. I would go so far as to argue that they are a philosophy of life (or at least of business).

That might sound a little kooky at first, but hear me out.

In the Wolf of Wall Street, Jordan Belfort (or at least Leonardo DiCaprio playing Belfort) says that money does more than just buy you a better life; it also makes you a better person. That’s certainly debatable. But I can credibly say that paying a dividend makes for a better kind of company. And here are a few reasons why:

  1. Dividends are an outward, visible sign of who the real boss is. Remember, the SEO in the suit running the company isn’t the owner. He’s an employee, no different than a common assembly line worker other than for his larger paycheck. You, the shareholder, own the company. And management shows that they understand and respect that by regularly paying and raising the quarterly dividend.
  2. Dividends dissuade fruitless empire building. Corporate CEOs really aren’t that different from politicians. At the end of the day, they spend other people’s money and often times waste it on useless projects or on mergers that add no value. Why? Because growth – even unprofitable growth – gives them more power and control. Well, paying a regular dividend forces management to be more disciplined. If you’re paying out half your profits as a dividend, you have to be more selective about the growth projects you choose to pursue with your remaining cash. They focus on the most profitable and worthwhile and, by necessity, pass on the marginal ones.
  3. Dividends foster more honest financial reporting. At one point or another, many (if not most) companies will… ahem… perhaps be a little less than honest in their financial reporting. Outright fraud is pretty rare. But accounting provisions allow for a decent bit of wiggle room in how revenues and profits are reported. Even professionals can have a hard time figuring out what a company’s true financial position is if the numbers are fuzzy enough. Well, while revenues and profits can be obfuscated by dodgy accounting, it’s hard to fudge the numbers when it comes to cold, hard cash. For a company to pay a dividend, it has to have the cash in the bank. So while paying a good dividend is no guarantee that the company isn’t being a little aggressive with its accounting, it definitely acts as an additional check.
  4. Share buybacks – the main alternative to cash dividends – never quite seem to work out as planned. Companies inevitably do their largest share repurchases when times are good, they are flush with cash, and their stock is sitting near new highs. But when the economy hits a rough patch, sales slow, and the stock price falls, the buybacks dry up. And another (and frankly insidious) motivation for buybacks is to “mop up” share dilution from executive stock options and employee stock purchase plans. The net effect is that a company buys their shares high and sells them back to employees and insiders low. Call me crazy, but I thought the whole idea of investing was to buy low and sell high, not the other way around. A better and more consistent use of cash would be the payment of a cash dividend.
  5. And finally, we get to stock returns. I’m not particularly excited about the prospects for the stock market at today’s prices. Based on the cyclically adjusted price/earnings ratio, the S&P 500 is priced to deliver annual returns of virtually zero over the next decade. But if you’re getting a dividend check every quarter, you’re still able to realize a respectable return, even if the market goes nowhere. And that return is real, in cold hard cash, and not ephemeral like paper capital gains.

Hey, not every great company pays a dividend. And certainly, a younger company that is struggling to raise capital to grow has no business paying out its precious cash as a dividend when it might need it to keep the lights on next month. But for the bulk of your stock portfolio – the core positions that really make up your nest egg – look for companies that have a long history of paying and raising their dividends.

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital, an investments firm in Dallas, Texas.


How to Become a Financial Blogger


My financial practice is an interesting creation of the internet era. I don’t do a lot of face-to-face networking, and I very rarely host dinners or live events. It’s not that I’m against doing these things but rather than they are expensive and time consuming, and I’m not very good at them. If these things were required to build a practice these days, then I would have never gotten off the ground.

I really don’t go out looking for clients. Most of my clients end up finding me after reading an article I wrote that made sense to them. In addition to my own blog, I regularly publish on Yahoo Finance, Forbes and Kiplinger’s, among other sites, so I manage to get in front of a lot of eyeballs.

I often get asked how I got into financial blogging. And my answer is always the same: I have no idea. It just sort of happened.

It was an odd experiment in trial and error, which means that I made every mistake there was to make before finally exhausting them all and managing to do a few things right. For any aspiring financial bloggers out there, I’m happy to share a little of what I’ve learned the hard way. This is by no means an exhaustive list and by no means a guaranteed path to success. There is always an element of being in the right place at the right time, but perhaps this list can better your chances of getting to that right place at the right time.

So with no more ado, here are my tips for cutting your teeth in financial blogging.

1. Use your real name and face. I have a simple policy on Twitter and StockTwits. If a person has a ridiculous handle (“KickassTrader47”) and uses a picture of a Star Wars character as their profile picture, this is not a person I take seriously. And the same goes for bloggers. First off, using your real name and face creates accountability. You can’t hide from your opinions or past recommendations. You own them, for better or worse.

And remember, as a writer you are building a relationship with your readers, even if you never meet them in person. Using your real name and face make you more personal and allows readers to identify with you and bond with you. That builds loyalty, and you need that.

There are exceptions here. One of my favorite bloggers goes under the pen name Jesse Livermore because his employer won’t allow him to write under his own name. And of course, there is “Tyler Durden” of Zero Hedge, who has created something of a cult following as a doom and gloomer. But these are the exceptions and not the rule. And if you’re wanting to build a brand around yourself, you need to use your own name and face. And don’t forget to smile in the photo.

2. Produce a ton of content. I’m always surprised by which posts of mine really get traction… and which ones flop. Thoughtful posts I’ll spend hours researching might barely get noticed… yet some hatchet job I threw together while watching Battlestar Galactica reruns might go viral. There is really no rhyme or reason to it. It seems to be totally random.

But that’s the nature of the internet. On any given day, a piece you wrote might get lost in the shuffle. But the very next day, an opinion maker might happen to stumble across an article you wrote and post a link to it. So the key is to simply get as much content out there as possible. It’s a numbers game. Put enough good content in front of enough eyeballs, and you’ll eventually get traction. It’s a marathon, not a sprint, and you shouldn’t expect instant success. Just make sure that you consistently publish content that readers will find useful or insightful.

Not every post has to be a masterpiece. I’m published blog posts that were nothing more than an embedded StockTwits tweet or a YouTube video. Just publish something that conveys an idea, even if it is a simple one.

3. Find publishing partners. SeekingAlpha might be the single best thing that ever happened to the aspiring financial writer. Anyone can submit an article. Now, not every article gets prominently published, of course. That’s up to the editors. But anyone that has a good idea to share can share it. Writing for SeekingAlpha got me noticed by InvestorPlace, which in turn got me noticed by other publishers. All of this is part of building name recognition and your personal brand.

You should also reach out to other bloggers and quote posts that you like. And when you do, make sure the blogger knows about it. Find their Twitter or StockTwits handle and post them the link. That can lead to retweets and to more eyeballs for your post.

4. Optimize your posts for search. “Search engine optimization” sounds complicated. It really isn’t.

Sure, you can get really scientific about it, but you don’t necessarily have to. Following a couple basic steps will get you most of the way there. First, you should obviously include the terms that would be relevant for search. If you are writing a piece about Walmart’s earnings release, you should probably include the terms “Walmart earnings” and “WMT earnings” somewhere in the post. You should also try to include those terms in the title of the post and the URL if possible. Second, include relevant outbound links… and if possible, get others to link to you. The more embedded you are in the web, the more you matter to Google.

Along the same lines, if you write about individual stocks, regularly post your pieces to StockTwits and include a cashtag. For example, if writing about Walmart, include “$WMT” in your tweet. This will get your tweet in the message stream for that stock… and get you on the Yahoo Finance page for that stock too under Market Pulse.

5. Have fun. And finally, have fun with it. If you enjoy what you do and your personality comes out in the posts, people will gravitate to you. If your posts read like a lifeless Reuters press release generated by a computer, they won’t. People crave human interaction and want to read the work of a real person, typos and all.

I try to keep it somewhat professional though certainly not formal. Basically, this means that I avoid profanity and personal insults and try to avoid industry jargon (no one wants to read about EBITDA). But importantly, I try to make it lively.  You don’t have to have the writing skills of Ernest Hemingway. You just need to have something a interesting to say.

And finally, I would add that superficial touches can make a big difference. Add a stock photo from Flickr or Google Images to add a little color to your post. And stock charts from BigCharts or any number of other sources make for a nice effect too.

Best of luck. The pool of quality financial bloggers gets bigger every day. There is no reason why you can’t be one of them.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. 

Photo credit: Mike Licht


Blast from the Past: Walmart Dividend Letter from 1985

I was digging through an old file cabinet that had belonged to my grandfather, and I found this little blast from the past: a Walmart (WMT) letter to shareholders from 1985, signed by Chairman and company founder Sam Walton.

As a child in the 1980s, I actually remember my grandfather proudly showing me a paper certificate for his shares of Walmart stock, and I remember the day he went electronic by handing the paper certificates to the trust department at the bank. He wasn’t sure he trusted the system and made sure to photocopy his certificates before handing them over…just in case.

Paper stock certificates seem so anachronistic today in this age of online trading and instant liquidity. It makes me wonder how different the world of trading and investment will be when my future grandchildren are going through a drawer of my personal effects.

1985 Walmart Dividend Letter

The truth is, I’m not sure how beneficial instant liquidity is in building long-term wealth. In fact, it’s probably downright detrimental. When my grandfather bought his shares of Walmart, the high cost of trading discouraged him from short-term trading. As a result, he was a de facto long-term investor, which ended up working out to his benefit as Walmart grew into one of the largest and most successful companies in history. Long after my grandfather passed away, the cash dividends from the Walmart stock he accumulated in his lifetime continued to pay for the retirement expenses of my grandmother–and for my college tuition! Had my grandfather had access to the instant liquidity of today, he might have been tempted to sell far too early.

My grandfather also practiced his own version of Peter Lynch’s advice to invest in what you know long before Peter Lynch became a household name. He was an Arkansas boy–born and raised not far from Fort Smith–and he liked to invest in local companies that he could observe firsthand. Walmart was one of those local companies; its headquarters in Bentonville is less than an hour and a half from Fort Smith by car.

I remember fondly my grandfather taking me to Fort Smith’s Walmart and buying me an Icee at the snack bar. He liked to walk the aisles personally to see what Mr. Walton was doing with his money. That might seem a little old fashioned today, but then, it’s still the approach taken by Warren Buffett and by plenty of long-term value investors. If done right, it works.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.