About This Blog and My Portfolio
This blog is different from most personal finance blogs out there, even those that focus on investing, in a number of ways. First and foremost, this is a digital trading journal for myself. Many bloggers claim writing a blog keeps them “accountable to themselves”. While I have no reason to doubt them, it is the PRIMARY justification for me. Fortunately given my portfolio size, I don’t need much extra to cover the annual hosting cost. The forced discipline of organizing and enunciating my thoughts as well as understanding the performance drivers in my portfolio have helped far more than that. This blog is not monetized and I intend to keep it that way. Since I’m not interested in growing a large following, I write about topics of interest to me and pertinent to my portfolio, not what may appeal to the largest number of potential readers.
Passive, low-cost indexing is the investment orthodoxy in PF blogosphere, while Dividend Growth Investing (DGI) is a sizable and tolerated minority. Still others find their niche in real estate in multiple forms. Universally though, market timing and speculation are reviled like the plague, the terms thrown around like schoolyard insults. Here on this blog however, both are openly embraced. It’s important to me to keep an open mind, receptive to multiple doctrines and practices. In quantum mechanics, a time-independent Hamiltonian is a special case of a time-dependent one. In the same vein, a static asset allocation is a special case of a dynamic one. The axiom of investing is “buy low, sell high”, although some finds fault in that it gives license to “speculation”, which only proves that their definition (typically a long-term, value-oriented) is too narrow.
I practice what I preach. My portfolio is set up to employ both passive and active strategies. The passive account, with the exception of PM bullions, rivals anything you see on Bogleheads. The active account, containing multiple sub-strategies, is on the more complex side among the real-life portfolios being shared openly. However, the complexity is not for its own sake. The primary motivation is the non-correlation between multiple sub-strategies (individual stocks, cryptos, and leveraged CEFs, etc.) while each is optimized independently. Secondly, each sub-strategy is subject to its own timing-overlay, which essentially means technical analysis is used for risk management with both capital and risk transfered between different strategies. A recent example is my exit from the crypto space and transferring part of the proceeds to PMs.
One often-heard objection to holding individual stocks is “what happens if you own GE, Kodak, or IBM (substitute any blue-chip that has fallen from grace)?” Well, if the investor is unable, or unwilling to learn to perform any fundamental or technical analysis, nor possesses any basic selling discipline, then indeed passive holding of low-cost index funds would be the recommended course of action. But if he is, there is no logical inconsistency for holding individual stocks. For the record, I used to own GE and sold it in March’17 at $29.81, realizing a small loss. GE closed today at $16.26. The same goes for taking advantage of an obviously-in-a-bubble asset like bitcoin. My ability and willingness to speculate allowed me to make 15 times the initial stake in 10 months. More fundamentally, I have a different perspective of “bubbles” (see here) that is propelling me to have a much higher equity exposure as we speak.
Studies I have read say only about 1% of traders are consistently profitable. To be the top 1% at in any field or craft deserves respect. Knowledge, analysis, judgment, empathy, and nerves are ALL required to make trading successful. So why are “market timing” and “speculation” held in such low regard? I can only suspect that the interlocutor has neither understanding nor aptitude in said art.
Readers should know that I’m a habitual violator of the cardinal rule of making predictions (i.e. forecasting) on the stock market: don’t do it — I mean the other one: target price or time but not both. It’s a luxury reserved for a no-name blogger with zero reputation to lose. There is a well-known saying in statistics,
All models are wrong but some are useful.
The same may be said about predictions, but it hasn’t stopped people from making predictions in all matters of life, from macro-economy to business planning, to personal finance. There are those who forswear predictions and forecasting about the markets, but I wonder how they determine how much to save for retirement and how big a nest egg they’ll need?! Perhaps they’re dissuaded by people that spew numbers willy nilly. That’s not how things are done here. Although not every step is explicitly posted on this blog, I try to follow this process:
- Pick a subject (index, stock, rate, economic indicator), set a numerical target. The difference between the current and target value implies the direction. Sometimes, the initial call is about a trend. As the trend unfolds, a numerical target can be zeroed in later.
- Set a time frame for reaching the target value.
- Select a tradable instrument in accordance with the prediction, have a plan for entry, execute said plan.
- Have guide posts along the way, i.e., interim tests of whether the course is unfolding as predicted.
- Have an exit plan, whether at the final target or mid-course.
- Review how well the prediction played out.
Step 3, aka “putting money where your mouth is”, is what separates a “talking head” from a practitioner. Worse yet, most what one reads on blogs or comment sections go no further than step 1. It’s only when real money is on the line that doubt/conviction, hope/regret all come to the fore. Execution, especially when things don’t go as planned, becomes paramount and account balance the final arbiter on the usefulness of the whole endeavor.
Past Predictions and 2018 Outlook
The final step in the above list is critical to our growth as investors. Below I’ll review what I think are the most critical predictions made on this blog. Often, the most important calls are about major trends lasting years, even decades. Several of the major trends are still on-going, hence I’ll weave in my 2018 outlook as part of the discussion.
By far the most critical predictions I made, as measured by the amount of capital committed and potential gains, were centered around the current bull market in stocks. I’m guided by a long-term equity pricing model — I took something that was out there, after a few modifications made it my own.
- The initial prediction was made in November’16 with a target of S&P 3400 in Q4’18.
- A follow-up in March’17 pushed back the top into 2019 and was the first mention of “S&P to end the year with a 27 handle” when it was around 2350. The 2700 level was actually crossed on the 2nd trading day of this year — I’ll give myself a pass here.
- In the first half of August, I started writing about a post-August moon-shot. The prediction was updated to “S&P to 3300-3500 and the NDX to 10K in 12-18 months”. Early September was the last time the S&P launched off the 50 day SMA. We have been going up every since, with signs of further acceleration in the last two weeks.
- The most recent update was made in early November where I called for NDX to reach 7792 by April. We are still seeing how this one is going to turn out.
- Conviction: very high
- Implementation: 100% Vanguard growth index in 529s since early 2017; raised equity allocation to 55% in passive AA since March/April 2017; QQQ options etc. since late June 2017
The bull market in stocks is still unfolding, which I expect to last into 2019. The main danger to that scenario is a premature parabolic phase into a top this year. For this reason, I view the more recent up-tick in investor sentiment with alarm. My model calls for a small correction in January/February, more serious ones in May/June then October. A pull-back in the immediate future is definitely healthy for the longer term sustainability of this bull.
I don’t have an end-of-year target in S&P since unlike in early 2017, mainstream analysts are sufficiently bullish. The top end of Wall Street estimate at 3100 was from the highly respected Ed Yardeni. Recently, Jeremy Grantham from GMO published a newsletter on “melt-up” that made the rounds. The chart below depicts the range of possibilities he saw:
Compared with my S&P target of 3300-3500 (closer to top of that range now), there is remarkably good agreement. My current timing range is in 2019, while the original one was Q4’18. For now this timing difference is of no consequence, but as we progress further into 2018, more precise handling is required. In due time I’ll disclose the 3-months timing window that my model has given since March’17. On the other side of the peak Grantham sees a drop of 50%, whereas I forecast “only” a 30% drop in The Next Bear Market last November. My 10-year projection was: starting from September’17, S&P does a round trip of 2500 – 3500 – 2500 in three years, followed by 6% nominal annually for 7 years for a combined 4.16% nominal annualized over 10 years.
- Big picture I believe gold will be the next bubble after stocks and has the potential to reach $3500-5000/oz. However, I’m hazy on the timing. The 8-year cycle bottomed at the end of 2015 and the current cycle should be right translated i.e. peaks between 2020-2024. The last gold peak in 2011 was 3-4 years after the peak in equities and more than 2 years after its bottom. We’ll have to see how similar this cycle is.
- On a shorter time scale, in mid October I tried to forecast the trajectory of the intermediate cycle by naming two potential dates in December and January. I was leaning towards January but was open to clues from the COT. The confirmation came mid December and I have been increasing my PM allocation since. Note gold price stayed above the July low, never touching the lower triangle line.
- Conviction: medium high
- Implementation: re-balanced 15% allocation in passive account already; also adding to active account
Given the weakness in the dollar, gold should do well this year, in a sense, tagging along the equity bull, ready to take over when equities falter. The waning dollar is likely to stoke inflation fears which is a segue into the next topic.
Fixed Income and Rates
- I believe that rates are going up, but will do so in a managed fashion and not in a straight line. I did NOT expect $AGG to gain 3.5% in 2017, but the bar-bell approach I took served me well.
- I’m on record to expect the 10 year UST yield to reach 2.8% in the first half of 2018. It just crossed Jeff Gundlach’s 2.63% “line in the sand” this week. We shall see how it plays out.
- Conviction: low
- Implementation: stable value funds and leveraged FI CEFs
I expect FI CEFs to give me the most headache this year. I like that the Pimco CEFs are hedging their interest rate exposure. Indiscriminate selling from other investors are a blessing, but I may not be able to take advantage of that blessing due to my limited tax advantaged space. As for the muni CEFs, the premium in $PCQ is still high but my remaining lot has a tax handcuff. $NAC on the other hand, is seeing its discount widen as rates rise. Its coverage ratio has finally gotten over 100% after the most recent distribution cut. I consider it fairly valued as I don’t see rates moving violently higher.
One of the most crucial questions is whether UST will provide safety when the stock bubble pops, or whether UST implosion will actually be the proximate cause for the pop itself. For now I can only plan on keeping the duration short when the credit cycle turns and be ready to move out of the multi-strat funds. I may resign to simply holding the muni CEFs since I only expect an average bear not an apocalypse.
- The one unequivocal prediction I made was on Dec 5 where I suggested $60K as a BTC target with a time window of Jan 3 – 19. Well, that was proven wrong pretty fast. BTC reached $19.8K on GDAX on Dec 17; I’m inclined to think that was THE peak.
- I explained in a later post some of the analysis behind that call. The total coin marketcap peaked on Jan 8th which was in my timing window. In early January I still held some ethereum but was out completely by the 16th.
- As of the end of December’17, I believe cryptos have entered a long-term bear market.
- Conviction: medium
- Implementation: no crypto position, may short a stock proxy
Just today I read two Reddit threads on the potential fraud in tether (reddit 1, reddit 2) that really shook me; and I don’t even own any crypto anymore! It can easily take down the entire complex overnight. I was going to swear off them until BTC is something like several thousand, but now I may start looking to short a stock proxy!
So there you have it, a recap of my major predictions along with my 2018 outlook. I place less emphasis on whether a prediction turned out correct, more on the following execution. Remember, the account balance is always the final arbiter!
None of the above is investment advice, the standard disclaimer applies.