StateStreet launched a convertible bond ETF with ticker CWB. I turned in an article to theStreet about the fund which will probably run Monday (maybe today). Without front running my article I will just say that I think this is an important segment for fixed income. Anyone who was in the space last year learned a lesson about how volatile converts can be (me included) but I do think there is utility in having a small weighting and actively managing it. I think the ETF wrapper will be superior to CEFs.Direxion, the triple long and triple short folks, listed four new funds;
3X Bull Ten Year Treasury
3X Bear Ten Year Treasury
3X Bull 30 Year Treasury
3x Bear 30 Year Treasury
The daily compounding of the triples is tough to game, at least for me, but as with the 3X equity funds people find a way to trade them. I have obviously been a big proponent of the double short S&P 500 ETF but have done nothing with the 3X and have not even written about them that much. I might be more inclined toward 3X short for hedging in a tamer environment like we had during the first six months of the bear market but since they weren't around back then there is no way to know if that would have been a good hold at that time.
Paul Krugman whipped up a bit of a ruckus when he commented that Austria could be the next country into bankruptcy after Iceland. Austrian finance minister Josef Pröll said it the comments were potentially a form of economic warfare. While I don't know about economic warfare the idea behind the reaction is that fear of there being a run on the bank will cause a run on the bank.
That said Austria is in a bit of a pickle. The growth catalyst at the start of the decade was that Austria was financing much of the expansion of Central and Eastern Europe. Now that part of the world is having a lot of problems and it would be very difficult for Austria to nationalize the bank debt if it "had" to.
A reader left the following quote and attributed it to Jimmy Rogers;
"Diversification is a scam. "Diversification is something that stock brokers came up with to protect themselves, so they wouldn't get sued [for making bad investment choices for clients]. Henry Ford never diversified, Bill Gates didn't diversify. The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket. You can go broke diversifying. Ask anyone who's diversified in the last three years. They've lost money."
Just look at various sector ETFs, country ETF's etc etc. They all went down. Diversification is a scam foisted on unsophisticated investors by scam artist wall street gurus and financial advisors. Do your homework and break free of the cnbc types.
I have no idea if Rogers really said that or not but even if he didn't you know this sentiment exists, the quote obviously paraphrases Andrew Carnegie with the bit about watching the basket. If you don't know my thoughts about diversification, and assuming you care, this post of mine on greenfaucet earlier this week gives an inkling.
Rogers has a point but so do the people who believe in diversification. How you structure a portfolio and how your thoughts about how to do that evolve ultimately has to make sense to you. You can and probably should read about the way other people do things to learn more about different methods or to gain more confidence in the way you do things or as I have said many times take a little bit of process from here, little bits of process from other places and create your own process.
Danny Ainge, get well soon.
15 comments:
Many formerly wealthy people on the Fortune 400 list probably wished they had diversified. I believe most people don't have the ability to consistently select winning investments, research has shown this to be true. People like Ford and Gates didn't select investments, they built businesses from the ground up. There is a huge difference between building business and trading publicly traded securities.
Wealthy trading firms earn their huge profits in fees from the poor saps who think they can divine the future.
For the average Joe, diversification across major asset classes makes sense.
Anon 5:48, I am barely an average Joe and diversification makes perfect sense to me. Maybe what Rogers meant was that blind diversification wasn't the best idea and doing some research, instead of just hedging all bets, could bring better returns?
And didn't Gates buy lots of other companies? Didn't H Ford make his cars in lots of different colors?
Watching the basket 24/7 is hard. I would like to grow my worth at a modest pace and have a life. Maybe diversification would be less exhausting?
Roger, you said,
"I do think there is utility in having a small weighting [in convertibles] and actively managing it. I think the ETF wrapper will be superior to CEFs."
This seems contradictory to me. ETFs as a rule don't do active management, but CEFs certainly do. So why would the ETF be better? And what kind of management did you have in mind?
Thanks.
I meant the holder being active not the fund itself.
Rogers is correct that you can make much more money by concentrating your investments. However, you can lose a lot more money that way.
Diversification helps lower risk. And, as we can see from the reaction of investors today, that risk drives their action (usually in a bad direction). Imagine having your net worth in AIG as Hank Greenburg did. He said he has lost $2 Billion in the company. And, this ex-CEO was on the board still if I am not mistaken. So watching your basket may not be enough.
If you can handle volatile swings then go ahead and try to find the next Microsoft. Just realize you are going to pick some losers so you better not scare easily. But, you may get lucky, and luck is the word, and find the next Microsoft.
Roger N- I have read your past comments whereby you utilize SDS as a hedge to your portfolio. Why would you not consider simply using "SH" as a hedge? IMO, due to the compounding nature of elveraged ETF's this will have a much better impact in dampening portfolio volatility.
1) on single days that the market goes down a lot SDS goes up more.
2) Did you look at a chart to compare the two during periods where the market went down? In 2008 SDS was up in the mid 30 percents versus 20% for SH. From the start of the year through the March 9 low SDS was up 70% versus thirty something for SH. I believe SDS to be far more efficient than SH. I'd rather have 2% in SDS with more cash in the money market than 4% in SH.
This was a point I made repeatedly while I was putting the trade on and was in the position.
Here is what makes sense to me:
The market is run by criminals, they make the rules. There is no free market.
Invest in real things that you can touch and control and for which you understand the rules.
Real Estate, local business, physical assets (gold,silver).
That is the truth a financial advisor will NEVER tell you.
Roger,
How will this conversion of Citi preferred shares to common shares affect the share price of the common stock holders. Have you read anything on this? Also what about the reverse split/ it seems to me that these seem to be desperate changes that could have a very negative effect on the common share holder. Any thoughts?
Thanks,
bwjr
Roger, have you done an analysis on how you being a financial advisor impacts you investment choices?
Meaning your income is based on people investing in the markets and so do you automatically promote and try to justify market investments in such a poor and broken market?
The best investments seem to be purchasing local mortgages at over 10% back by local real estate that you check out yourself. Do you ever recommend local mortgages to you clients at 10%+ low risk return?
i don't follow Citi anywhere near close enough to answer that question.
I don't do anything with local mortgages and your tone about promoting anything is off base--feel free to hit the bricks.
Roger,
Keep up the great work...and also for defending the many good folks who work in the industry and do not promote the market...whatever that means...enjoy and appreciate your work!
Hi Roger.
I'm UK based and have a TD Waterhouse brokerage. Today I received a changes to terms and conditions notice and note that in trading under TD's nominee account there are risks should TD go to the wall. This applies to both cash and stocks (48K UKP cash protection, 100K Euro's stock protection).
Do the same risks apply in the US and if so may I ask what do you do to mitigate those risks (I've opted to continue with 3 separate brokerages instead of migrating towards a single broker as I had been previously, albeit slowly, doing).
Best. Clive.
thank you Jeff.
Clive, I don't know about TD Waterhouse specifically but most brokerages, including Schwab who we use, carry insurance up to some huge amount (maybe $100 million?) to address this. Of course I;m not sure how an insurance company would pay out on Schwab's $1.2 trillion in assets (maybe they continually buy puts ;-)) but because of the insurance I don't need to worry too much about it.
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