The New Finance Of Longevity

Basking In The Intrinsic Warmth of Red Numbers

Is there actually an upside of a 900 point slide?

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to Advisor Magazine. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]

Most investors become agitated when the “% Gain or Loss” column on their account statements turns gradually from mostly green to mostly red, as it did during November. They see this as a bad sign, as a signal that something is going wrong with the securities in their portfolios.

Large numbers of investors are primarily speculators, gambling on the direction of the stock market and the strength or weakness of particular sectors. They cue off the opinions of gurus and prognosticators, load up on “hot” issues, and boast about the mammoth gains and “returns” that they’ve achieved on what is really just a temporary (albeit long lasting) inflationary burst in the market averages. They tend to “sell their losers and let their profits run”.

You Cannot Spend ‘Unrealized Returns’

Few investors take the time to realize that they cannot actually spend “unrealized returns”, no matter how attractive they may be on their account statements. They are convinced, because of the low interest rate environment we’ve been in since 2009, that they can’t get decent “spendable returns” outside of the stock market. They don’t appreciate that directional change in statement market values is not only the normal, cyclical, “genome” of the financial markets, but also the single most potent investment opportunity that the investment gods provide!

Friday’s 900 point drop in the DJIA, for example, was seen by some groups of investors as the best buying opportunity they have been given in many months… a chance to reinvest remaining cash from “disciplined” profit taking and high levels of monthly income.

The majority of investors want to operate in an up only, “big green numbers only” universe… one which most experienced investors realize doesn’t actually exist long term. They tend to be unprepared for either volatile or down trending markets… many have never even experienced the latter. Few focus on income generation and most are encouraged to ignore such issues because “potential returns in the stock market are generally so much greater than in income purpose securities”.

Employing A Different ‘Selection Universe’

Most retirement programs are actually built on the (misguided?) premise that income will be provided by selling a percentage of assets each year and the speculation that the market will always provide enough growth for this approach to be sustainable.

Some investors go about the process in a seriously different manner, using a different kind of selection universe, some uniquely different and more realistic measurement tools, and a classically safer, income productive, trading discipline. And they do this using the very same securities as those worshipped by their more speculative neighbors!

Closed End Funds (CEFs) are professionally managed investment companies that contain precisely the same stocks, bonds, preferred stocks, mortgages, loans, real estate, commodities, option strategies, etc. that most investors hold (or use) in their portfolios. But, CEF managers focus on generating the most investment income they can for their shareholders… using both equity and income securities to accomplish that end.

Individual company managements plow most of their earnings into executive salaries and benefits and then back into their growing businesses… little if any makes its way into shareholder dividend payments. 95% of CEF earnings and trading profits (on these same companies) go directly into the hands of CEF shareholders. (Not a new concept by the way. CEFs were developed years before Mutual Funds and 100 years before ETFs.)

And then there's the "gravy", the "reasonable", "sensible", "repetitive" PROFIT TAKING discipline that can be applied to every position, regardless of its asset allocation purpose...

Closed End Fund investors (the experienced ones) understand that a rising net asset value is not nearly as important as a stable or rising distribution rate. Trusting that experienced CEF managers aren’t getting hundreds of millions in salaries and bonuses, they expect that the NAV of positions will rise and fall with the general direction of the markets. The current market value of positions being a function of supply and demand for the approach, content and income generated by the portfolio itself.

Actually, a rising NAV could mean an off purpose, lower than possible, distribution rate.

Using The Q D I + PT

Closed End Fund investors can build high QUALITY portfolios based on the longevity of the funds, their content and diversification, the experience and reputation of fund providers, distribution history, etc. They can use every conceivable manner of DIVERSIFICATION: position size, content, sector, country, duration, and purpose of each position, growth or income production. INCOME is distributed by every holding, with the average equity based CEF actually providing more spending money than the average income purpose portfolio… because?

This spending money is not a small number, averaging close to 8% (after all fees to the managers and based upon a selection universe containing approximately 200 CEFS ranging in yield from 6% to over 10%).

And then there’s the “gravy”, the “reasonable”, “sensible”, “repetitive” PROFIT TAKING discipline that can be applied to every position, regardless of its asset allocation purpose. A measly 3% average profit per holding brings an annual realized income level higher than the market value growth rate of the stock market… forever! Then, of course, there are years (like this one) where entire portfolio inventories have been… multiple times.

A large selection universe facilitates trading as it provides a perpetual inventory of appropriate replacement parts for every CEF that produces a “capitalized” profit… a perpetual working capital and income growth scenario.

Preparing For A Fall…

CEF portfolio management is easier (and potentially safer) than individual securities, for many of the same reasons professionals used to spout in turning investor attention toward Mutual Funds and then to ETFs. The former for professional management, the latter for the lack thereof plus lower cost. Since the management focus in these products is solely market value growth, they emphasize “total return” to obfuscate the pathetic income most of them produce.

And when the markets have the audacity to fall… well, that’s when QDI selected CEFs become even more attractive as they take advantage of the “red numbers” on the account statement. Investors can “warm up” their cash flow and future profit potential by adding to their diverse holdings, decreasing cost per share and raising yield on investment with every transaction.

So for CEF “shoppers” (similar to real world general merchandise buyers), lower prices are always a “call to the mall”. And one other interesting thing about the CEF approach that is critical for retirees and soontobees:

Because portfolio monthly distribution income can be managed to outstrip even a 6% withdrawal rate (50% more than what is considered normal), both Working Capital and realized distribution income can be expected to rise each quarter regardless of the direction of either the stock or bond markets.

So bring on the big market dumps, the unusual volatility, the 10% or larger market corrections, and the over the top rallies… QDI + PT CEF portfolios are designed to benefit from them all.

 

One response to “Basking In The Intrinsic Warmth of Red Numbers”

  1. Adam Thielen says:

    Challenging article. I really appreciate the insight!