On My Radar: How You Played the Game
February 7, 2020
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“For when the One Great Scorer comes to mark against your name,
He writes not that you won or lost, but how you played the game!”
– Grantland Rice
In 1907, sportswriter Grantland Rice saw what he would call the greatest thrill he ever witnessed in his years of watching sports. During the Sewanee-Vanderbilt football game, Vanderbilt center Stein Stone made a spectacular catch on a double-pass play that was then thrown near the end zone by Bob Blake to set up a touchdown run by Honus Craig. It was the winning play, the one that beat Sewanee at the very end for the SIAA championship. In Spalding's Football Guide's summation of the season, Vanderbilt coach Dan McGugin wrote, "The standing. First, Vanderbilt; second, Sewanee, a mighty good second."
Early in his career, Grantland worked for the Atlanta Journal and the Cleveland News, before becoming a sportswriter for the Nashville Tennessean. Sewanee Tigers coach Billy Suter hooked him up with the job at the Tennessean. They met when Suter was coaching baseball teams that Rice played against during his time as a student at Vanderbilt. That role led to a number of big-time gigs at major newspapers across the Northeast. More than a century ago, he wrote his first Sportlight column in the New York Tribune, and contributed monthly Grantland Rice Sportlights to Paramount newsreels from 1925-1954.
Starting in 1925, he began selecting the College Football All-America Teams, following in the footsteps of Walter Camp, and making a real name for himself. Grantland also referred to the backfield of Notre Dame’s football team as the "Four Horsemen" of Notre Dame—pulling inspiration from the bible—in a New York Herald Tribune piece that helped make him famous. His captivating description of the October 18 Notre Dame vs. Army game at the Polo Grounds is as follows:
"Outlined against a blue-gray October sky the Four Horsemen rode again. In dramatic lore they are known as famine, pestilence, destruction and death. These are only aliases. Their real names are: Stuhldreher, Miller, Crowley and Layden. They formed the crest of the South Bend cyclone before which another fighting Army team was swept over the precipice at the Polo Grounds this afternoon as 55,000 spectators peered down upon the bewildering panorama spread out upon the green plain below."
I just loved Grantland Rice. My mom, who knew of my fondness for sports, bought me a book that summarized Rice’s New York Tribune Sportlight stories. He had a way of pulling you into the story and I found his writing style easy to read.
My mom’s message to me was simple: “It’s not that you won or lost but how you played the game.” But…
They are known as famine, pestilence, destruction and death. These are only aliases. Their real names are: Stuhldreher, Miller, Crowley and Layden. The crest of the South Bend cyclone… I just had to know who won that game.
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I promised I’d share a few takeaways from this year’s Inside ETFs conference in Hollywood, Florida. We’ll do that today. I’m also sharing with you an investment idea around high and growing dividend-paying companies. I conclude with one last tribute to Kobe Bryant.
Given today’s ultra-low interest rates, there is simply no way a 1.65% 10-year Treasury can help an investor’s portfolio the way the higher yields of years past did. Factor in inflation and our returns will likely be negative over the coming ten years. I think we are nearing the end of the long-term secular move lower in yields. So, I headed to Florida with an eye on finding a few ETFs that focus on high and growing dividends.
If you are not familiar with ETFs, they are an excellent investment structure with favorable tax advantages. Let’s say you have an investment in an individual stock you’ve owned for years. Or perhaps you have a high percentage of your wealth concentrated in Amazon, Google, or Berkshire Hathaway. Wealthy families think in terms of managing their wealth over multiple generations. Great wealth is generally created from family businesses and targeted risk exposures. You’re not going to get rich investing in a 60/40 stock and bond portfolio.
For many families, there comes a time when creating wealth turns to defending wealth. That’s where broad diversification comes into play, and that may mean selling a stock with a low-cost basis. The tax burden may be too great, yet so is the risk of failure. One only has to look at General Electric to see the risk to a family’s wealth should an unimaginable fall take place.
I learned a great deal more at the conference about how to move highly concentrated positions into an ETF structure in a way that doesn’t create a taxable event. Say you have most of your wealth in Amazon stock. Through the process, you can deliver your stock into an ETF that will give you the broad stock market exposure. Something your family can own for multiple generations. There are some complexities to the process, but that’s the gist. That information alone was worth the trip.
ETFs are a unique tool. No tax event and better diversification. There is a way to do this and have it make sense. You can even create your own multi-generational ETF for your family. If you are a wealth advisor working with high net worth families or an individual investor and would like to learn more, shoot me an email. I’ll point you in the right direction.
Here are a few other takeaways:
Active ETFs was a dominant theme. Because of the structural advantages ETFs offer over many mutual funds, large actively-managed mutual fund families are seeking a way to package their strategies inside an ETF without giving up their intellectual property. They don’t want others seeing their poker hand, as it may be a disadvantage when they go to sell a particular stock. The ETF is simply the structural vehicle. The idea of non-transparent portfolios is the next wave of new ETF business. The movement of actively-managed mutual funds into an ETF wrapper was the biggest story at the conference.
Socially responsible investing, or ESG (environmental, social, and governance), was another big topic. My friend Eric Balchunas, an analyst at Bloomberg Intelligence, is focused on ETF shares, pointed out that “surprising exclusions from ESG funds cause them to lag the broader market.” He wrote a post-conference article concluding, “Exchange-traded funds that cater to environmental, social and governance principles are being pitched as a way for investors to sleep with peace of mind, but they better be prepared to wake up with something less than dreamy returns.”
Eric shared an example. Essentially, investors can have ESG or Warren Buffett, but not both.
So why is Buffett, one of the greatest investors and philanthropists the world has ever seen, not in these funds? One big reason is that Berkshire’s board is only 57% independent, well below the 86% average. Buffett has signaled no intention of changing the company’s business practices. He implied the independent board is a poor metric, saying many such boards he has been on are independent on paper only, with many directors just looking for a payday and typically following the CEO’s lead. Buffett has also said he doesn’t want to burden subsidiary companies, one of which operates coal-fired plants, with unnecessary rules and costs.
"We’re not going to spend the time of the people at Berkshire Hathaway Energy responding to questionnaires or trying to score better with somebody that is working on that. It’s just, we trust our managers and I think the performance is at least decent and we keep expenses and needless reporting down to a minimum at Berkshire."
You can find his article here. And you can follow Eric on Twitter @EricBalchunas.
Eric said, “He believes that ESG is being sold like you’re doing something good but you’re kind of getting hosed.” Phil Mackintosh, chief economist at Nasdaq, Inc., thinks ultimately success will depend on performance.
One other interesting takeaway came from Invesco’s Dan Draper. He talked about asset manager fee wars and wondered aloud about how firms can make money with such low fees. He believes firms will shift from charging fees based on assets under management to fees based on data under management. Essentially, selling their data. Something about that sounds like a very bad idea to me. Worth noting.
GMO’s James Montier said the 60/40 is in trouble. “It won’t work the way people expect it to work. You can do better.” He added, “You can build a portfolio that can drive portfolios but it will have to look entirely different.” Here is the Seven-Year Return Forecast (as of December 31, 2019) from GMO:
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Emerging Market Value ETFs anyone?
How about -4.9% per year for the next seven years? And it’s negative across the board for bonds. Avoid the research at your own risk.
So what can you do? Here’s an idea from my good friend Kevin Malone. Kevin founded and runs Greenrock Research. Think about this as an alternative for a portion of your fixed income exposure. The concept is both logical and simple: invest in companies that pay high dividends and have management teams that have a history of consistently increasing their dividend payouts to their investors.
Kevin’s been investing in high and growing dividend stocks since 1999. He was in my office this week and shared some of his research with me. Picture investing in a 4% yielding portfolio of high and growing dividend stocks and five years later that basket of stocks yielded you 7.5%. You start with high dividends and they increase as time moves forward. That to me is a much better risk bet than allocating to a 1.65% yielding 10-year Treasury.
Of course, there is market risk. Stocks will go down in price in a recession—and that’s a real risk. On my Florida conference agenda was to find ETFs with rules that seek exposures to this very theme. I found a small handful of high and growing dividend ETFs and we are adding the basket to the turnkey asset management platform we run for our advisor clients and using some straightforward stop-loss risk management rules (much like you’ll find each week in Trade Signals) to avoid the big market declines. This is something you can implement on your own or get help with from a good investment advisor. Please note this is not a recommendation for you to buy or sell any security, as I know nothing about your goals, needs, suitability, and risk objectives. And there’s no guarantee past performance will predict or guarantee future performance. But we must take risks in life, and I think this is a good alternative to fixed income, due to today’s starting conditions. Shoot me a note if you’d like to learn more.
That’s it from the conference. Hope you find this week’s missive helpful. I’ve purposely avoided politics (painful to say the least) and we might touch on the Coronavirus next week. I can tell you I’m seeing more and more medical masks in the airports.
When you click through you’ll find a link to an Andrew Ross Sorkin interview, where he discusses his book Too Big to Fail. A good reminder of the moral hazards that existed in 2008 and continue to exist today. Andrew suggests two straightforward solutions. I like suggesting solutions, rather than just complaining. Helps advance dialogue and debate.
I also came across an article in Institutional Investor magazine. The mother of all bubbles is in the bond market. I keep writing about the epic investment opportunity that is coming in the high-yield corporate bond market. The article will help set the stage and give you a sense for why the opportunity will be so big. It’s not here yet.
Lastly, a friend sent me a link to a letter Kobe Bryant wrote at age 38 to his 17-year-old self. It’s very good.
Coffee in hand? Let’s go.
If a friend forwarded this email to you and you’d like to be on the weekly list, you can sign up to receive my free On My Radar letter here.
Follow me on Twitter @SBlumenthalCMG
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Subscribe to On My Radar
Included in this week's On My Radar:
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Too Big to Fail by Andrew Ross Sorkin
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"High-Yield Was Oxy. Private Credit is Fentanyl." (Institutional Investor)
- Trade Signals – Equity, Bond and Gold Signals Bullish
- Personal Note – Letter to My Younger Self by Kobe Bryant
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With kind regards,
Steve
Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
10 Valley Stream Parkway, Suite 202
Malvern, PA 19355
blumenthal@cmgwealth.com
(P) 610-989-9090
(F) 610-989-9092
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