Posted by: Tom McKeon on January 2, 2019
It has been a little while since we posted so there are a few things for us to catch up on: Bear Markets, Silver Linings, Monte Carlo & more.
Real Pain and the Absurdity of Arbitrary Thresholds
The markets generally had a rough 4Q-2018, and the US stock market had its worst December since the Great Depression, as you already know. What strikes us as a little silly is the pundit class declaring that we have entered “bear market territory” once the market breached a 20% decline.
We can’t imagine many investors with a portfolio down 19.5%, comforting themselves with the thought that “…at least it isn’t a bear market.” The punditry has to produce some content and 20% is big fat target. But believe us, investors know what a bear market is, well before the arbitrary threshold of down 20% is approached.
Moreover, once the “bear market” bell was rung, the bellwether Dow Jones Industrial Average (DJIA) staged its biggest one-day rally in points and followed it the next day with its biggest one day turnaround (from down 800 points to up 250 points). All this in the days just before the Christmas holiday. For the folks who take their cues from the media and took their lumps by bailing out of a down 20% market—Ouch! This behavior is exhibit A in why many or most do-it-yourself investors never achieve the stated returns of their fund investments. It probably explains why many professionals fail to match the market returns as well.
Sell-Off Silver Lining
Avoiding Taxes Is Just Like Making Money
Ben Franklin said it best: “a penny saved is a penny earned.” We never root for a down-market but he sharp sell-off in the markets at year-end gave us the opportunity to minimize capital gains and income taxes for our taxable accounts, by realizing both short and long term losses. It also let us do some repositioning without incurring additional gains.
It is not the same as investment performance, but avoiding taxes whenever possible is a good thing, and one of the values we provide as a standard component of our advisory services.
We were able to generate losses to offset gains with a minimum of portfolio disruption, maintaining market exposures with close proxies of ETFs sold. Our taxable investors will see some additional activity in late January, early February 2019 as we rotate out of the proxy investments back into the core model investments. This is to avoid the 30-day wash sale rule.
Thinking (Dreaming, Fantasizing) About Retirement?
Don’t pull the trigger before we perform a Monte Carlo Simulation & Analysis for your retirement assets.
We recently updated our Monte Carlo Simulation tool by writing from scratch a program in the Python programming language (yes, we are showing off).
Named for the famed global gambling Mecca, a Monte Carlo simulation uses a random distribution function—based on a given average return and measure of return dispersion (standard deviation) to generate a series of outcomes. Those inputs are informed by relevant market averages and variance for the anticipated retirement investment portfolio.
Once the simulation is run multiple (dozens, hundreds, thousands) of times, the average and range of outcomes is a valuable tool in projecting how a portfolio will perform in the future, incorporating the realism of market randomness and variability.
Anyone contemplating retirement should seek to have a Monte Carlo analysis performed on their retirement (and supplemental) assets to help them understand what the likely outcomes are, the income they will produce and the inflation protection they may provide.
Ask us for your analysis. It’s free for CSCM clients, included as part of our advisory services.
Clothier Springs Capital Partners
Solid private market returns compare favorably to the public market returns of 2018.
Clothier Springs Capital Partners wrapped up its first 10 months of operations at year-end 2018. Net Asset Value returns for the partial year are close to 8.5%, driven largely by interest and dividend income. We don’t have to tell you that compares very favorably to the returns delivered by the listed markets for the quarter and year.
By year-end 2018, we had made investments in ten separate projects or businesses. All of the investments pay a cash (quarterly) dividend, monthly interest or monthly unrealized return (NAV appreciation). Weighted average annual yield on the partnership investments is a hair over 10%. Additional partnership returns will be realized as the projects refinance, recapitalize or are sold.
We are still shooting for the partnership to raise $2.5 million, at which time we will close the partnership to new investors and let the current investments perform. The partnership is now just below $1.7 million. We may open the partnership to new investors at a future date, or perhaps launch new partnerships.
CAMA Plan Valuations
Investors in the Clothier Springs Capital Partners LLC through their self-directed IRAs custodied at CamaPlan will need to provide them a 12/31/2018 valuation of CSCP before January 20, 2018. We will have that for you shortly, as soon as all our partnership investment valuations are updated by their sponsor(s).
Tell Your Friends
Don't Keep Us a Secret
CSCM is committed to helping investors improve their outcomes. From our low fee structure to our broadly diversified, globally allocated, evidence-based portfolios to our methodical, rules-based hedging, to our partnership for private market investment, to our value-added tax minimization strategies, Clothier Springs is not your typical advisor.
Introductions from clients are our best tool for finding new investors who need advice and guidance. Don’t keep us a secret. Tell your friends, relatives, colleagues, HR people, charitable organizations, etc. They will be glad you did.
You could start by forwarding this email. Thanks in advance.
Year-End 2018 Odds & Ends
January 2, 2019
New Highs, Party Poopers & Financial Engineering
August 30, 2018
PremiumPoints 2Q-2018 Issue: "Structure IS the Strategy"
July 19, 2018
We’re in the Client Outcome Business, Not the Investment Performance Business
May 23, 2018
10 + 1 Things to Degrade Your Investment Outcome
April 27, 2018
PremiumPoints 1Q-2018 Issue
April 19, 2018
Alpha, Schmalpha and the Persistence of Sub-Optimal Business Models and Investment Advisory Offerings
March 19, 2018
PremiumPoints 4Q-2017 Issue
January 23, 2018
Of Dot-Com's, Internet Bubble and Pseudo-Currencies
December 7, 2017
Cryptocurrencies, Intrinsic Value and Greater Fools
November 1, 2017
The Pain in Active Management Land Must Be Unbearable…
October 9, 2017
PremiumPoints 2Q-2017 Issue
August 17, 2017Tweets by @clothiersprings