Aggressive Paranoia: The Joseph™

Aggressive Paranoia: The Joseph™

Everything in moderation; nothing in excess

Bubbe Schwartz

          Not.

Standing in the middle of the road is very dangerous;

you get knocked down by the traffic from both sides

Margaret Thatcher

People who stand in ‘the middle of the road’ get run over

Rush Limbaugh

          No – this is not about politics – but about – ENOUGH – and strategic thoughts in the age of Capitalism without Capital – protecting ENOUGH.

          Security Analysis and security analysts (putting aside the fiction of the Chinese Wall between analysts and investment bankers in the same firm) are in denial. Shaking the foundations – forget mere shaking – destroying, devastating the basis’ of security analysis is disruption – not mere change – fundamental disruption. Result: ‘black & blue Swans in the red’ to underlying assumptions and models in securities analysis (which of course the reaction to is ignoring, then ridicule and finally taking credit for that which it initially discredited).

          How so?

          One study featured in Best’s Review (the foremost insurance industry monthly periodical) stated that 80% of the value of the S&P 500 was in ‘intangible assets’ – trademarks, patents, trade secrets etc etc. Even if half correct – the whole compass of analysis changes – and as yet, there is a lot of blowharding but not generally accepted principles on this other than Groucho Marx principles (to paraphrase) ‘I got principles (that sound good on CNBC) but you don’t like those principles, I got other principles.’

          There now is even a book ‘Capitalism without Capital.’

          Therefore, what is the implication for ENOUGH?

          A step back before to reinforce the questionable value of security analysis – given its conflicts of interest – even before this tsunami – which granted shows my bias (I was trained in security analysis in college as well. )

          Typically, in general, 70% of a movement of a stock is the market itself, 20% the industry, and 10% the company itself unless there is news etc particular to the stock. Secondly, there is a difference between the business of a company and the stock of the company – which most analysts in their offices don’t understand let alone have dirt under their fingernails (though they may have corporal tunnel as an occupational hazard – with secondary sprained thumbs from texting.) At best, an analyst can really know maybe 1 or 2 industries only a handful of stocks and their particularities within those industries. (Believe me, asset manager/analysts masquerading as ‘personal financial planners’ especially compensated per the asset under managment are even worse except in glad handing.)

          Thus, an approach I employed, subject to ENOUGH (per amount after tax, duration, after inflation and risk adjusted ((return on beta etc)) was focused diversification.

          Focused diversification? How’s that for cognitive dissonance and a pattern interrupt?

          What was specific manifestation of focused diversification again qualified by ENOUGH per objective (and recalling don’t sacrifice what you need for what you don’t need)?

          The purchase of 3 or 4 focused value mutual funds – which typically would have 70% of more of the fund’s assets in 10 or less stocks – and 10%++ in cash. Critical is 3 or 4 funds – not one. Why? While each is focused with the best thoughts of their analysts (which can’t know each more than 1 or 2 industries) – by 3 or 4 – one gets the diversification.

          And it worked for 30+ years – of course stipulating withIN the confines of the objective – remembering more, better, now has a habit of becoming worse, less, later – thus manage the goal not the assets.

          But no longer.

          Adding to the disruption headwind is demographics. With the aging of America – more money will be pulled out of the markets – regardless of earnings growth – than invested. The hopeium, since the legacy costs politically prevents cutting government deficits – is growth (i.e. the Trump tax cuts) which is most likely not enough without cutting deficits – especially as interest rates rise crowding out equity investment.

          The answer – sorry – unlike Cramer CNBC etc etc – I don’t have one – except ‘The Joseph™’ to minimize the paranoia of one getting whipsawed endangering goals on the inevitable downs in the markets. (The whipsaw: how many – no one is looking – got the Heebie Jeebies when the market went down nominally 1000 points and called their planner etc? How many called back after several days when the market recovered 1000+ plus some more? Out of practice now 20 years – I had calls after than 1000 point drop BUT not a damn one to thank me or at least acknowledge my calming them with in market declines they are two even three times faster than the recovery.

          Ok, what’s The Joseph™?

          Hint not related to an orange flavored aspirin for children

          First a little Torah to introduce The Joseph™

And, behold, seven other cows came up after them out of the River,

ugly and lean of flesh, & stood by the other cows upon the bank of the River. 

The ugly and lean cows ate up the seven handsome and fat cows.

Joseph’s Interpretation of Pharaoh’s Dream Genesis 41:1-4

          The seven emaciated cows gained no weight eating even fatted cows. Thus, this event historically the first application of the Adkins Diet™

          Joseph counseled the Pharaoh that there would be 7 prosperous years and 7 years of famine. Thus, put away grain etc during the prosperous 7 years to endure and thrive the 7 years of famine (downturn).

Other than eliminating debt, a minimum of 2 years standard of living (at the gotta & level of annual expenses – NOT nicetas) in cash (money markets), near cash (bonds A+++ with less than 2 years average duration) or even more years – subject to the confines of the goals. And if necessary, reduction of the amount of each goal.

          Yes, this will reduce the overall rate of return (see aforementioned reduction of goal) though maybe less than one thinks – considering the 2+ years allows one to have higher deductibles or wait periods on one’s home, auto, disability and long term care policies reducing annual premiums – the savings from which is in effect a partial offset in the overall rate of return per goal.

          As for investment –  the rate of return of the market given the headwinds of demographic shifts, the deficit time bomb of legacy costs and increasing interest rates overall should be less (caveat maybe the impact of 3D will offset this anticipated lower rate of return for the market.) Now think of the impact of investment fees in light of this assumption way: a 1% management fee on 10% rate of return is 10% of the take. But if the rate of return is 5%, the 1% management fee is 20% - not including the up to 1% ‘personal financial planning assets under management fee.’ Reduction to .30 management fee increases the net on 10% and 5% gross rate of return from 10% of the take netting 9% pretax to 9.7% or an 7.77% increase and on the 5% rate of return otherwise 4% gross rate of return to 4.7% or 14.8% -- better protecting the downside in paranoia.

          For the upside – since there is little tried and true – in the disruption – one may consider aggressive funds etf’s in terms of those investing in disruptors again subject to the confines of the goals. But the concept of ‘moderation’ while there is fundamental disruption (akin to buying more yellow cabs medallions with Uber around the corner – or taking a large position in Sears – forgetting the ghost of Montgomery Wards) – has a high probability of road kill – run over in the middle of the road.’

Thus, aggressive paranoia –to increase (in Taleb’s term) antifragility) minimizing the black and blue of the Swan (the cash –near cash for example cushion) at the same time being more aggressive – to deal with the stressors rather than seek the comfort (and the fragile) of the tried and true ‘moderation’ of my Bubbe Schwartz (exception her hand rolled pineapple with powdered sugar turnovers from my obnoxious petulant childhood).

          But of course there will those who say, ‘I can beat the market.’ Given the tectonic shift in valuation and headwinds – until new generally accepted security analysis principles come about (and that is questionable given the inherent conflicts of interest) – think about ‘The Joseph™ relative to your ENOUGH goals while having an Adkins’ Protein Bar & Shake™.