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Sungarden Investment Publishing’s Rob Isbitts talks tactical portfolio management and dodging market scares (0:50). ETF portfolio and option combinations (6:25). Rob’s risk averse YARP portfolio gaining even when S&P isn’t (18:20). Tripling position in Starbucks – part luck, part proof that process works (27:55).
Transcript
Rena Sherbill: Rob Isbitts, who runs Sungarden Investment Publishing on Seeking Alpha, ETF Yourself and a number of other things, always great to talk to you. Always great to have you on Seeking Alpha. Thanks for taking the time.
Rob Isbitts: Well, thank you, Rena. It is great to be back with you. And really, anything I can do with Seeking Alpha is a good day.
RS: Yes, we feel the same. And here we are in the dog days of summer trying to bring some sunshine to the markets. A lot of volatility, some confusion, some fear, some excitement, how are you holding in these volatile markets these days? What are you thinking about broad picture? How are you seeing things?
RI: Sure. So let’s start with the idea, which anybody who knows me a little bit in the business knows, I thrive on this stuff. I mean, this is kind of my bread and butter. Yeah, I’m not only…
RS: The veterans always do right, Rob? The veterans always do thrive in these kinds of markets. Is that right?
RI: I guess so. There’s something to be said for having seen it a million times and especially as a chartist, I told the story before, I’m 60 years old, but I’ve been charting for 44 years because my late father taught me and he was a DIY investor, which is why I have a special kinship with self-directed investors.
And you look at enough charts, you hear enough chatter. It’s not that there isn’t something new because the markets are always evolving. And to me, that’s really one of my main themes. The markets are evolving. I was trying to figure out a way to talk about this with you today without dipping into analogies to fantasy sports, but I don’t know if I can avoid it.
RS: I thought you thrive – I thought that’s something else you thrive on, sports analogies. I don’t know you’re going to get away from it.
RI: Sports, yes. But I don’t do a lot of fantasy sports, but yeah, I certainly am conversant in new sports analogies and pop culture analogies whenever I can in my writing.
But think of it this way, okay? A lot of people are going to be starting fantasy football season soon. And I’m pretty sure there aren’t too many people that are going to say, I’m going to set my roster the first week of the season, and there are going to be no injuries and there’s going to be no one that I want to replace for performance reasons. There’s going to be no rookie that emerges or a player on the new team. I mean, there’s always something that is going on.
And so anybody who plays fantasy sports knows that the way you win over time is through, let’s call it tactical management of your roster. And to me, that’s what a portfolio is. And I’m four years removed from selling my advisory firm, and that was my business for 27 years as a boutique shop. My wife and I sold that practice in large part because I felt like my experience in managing risk, especially times like this, and putting process and structure over stock picks could help to simplify, maybe democratize investing for a wider audience.
And, of course, Seeking Alpha is one of the main communication vehicles for that. So two years into it, thank you and thanks to the editors and everybody else.
But when you get to the current market, I mean sort of same blank, different order. It seems like there’s always threats coming up. And again, as more of a technician and a quant than a fundamental analyst, I’m less concerned about predicting where the S&P is going to be at the end of the year because I don’t really care.
I look at what’s in front of me and I have a process that I have used. And right now what that process is telling me is that we just dodged a little bit of a scare. It didn’t take too long.
But as I wrote in an article for Seeking Alpha very recently, this period that we are in, especially like starting last October when the market bottomed and then flew higher, but it was really led by a small number of companies, the market today is starting to resemble, it’ll never be the same, but it’s starting to resemble different parts of 1987, as well as the year 2000 dot-com bubble.
However, the markets work differently today, and frankly, they move a lot faster. And that’s why I kind of feel like what happened with the yen carry trade and all that not too long ago was something that might have taken a little longer to play out in, let’s call it the V that was formed by the stock prices cratering and then quickly coming back.
But I’m with the camp that says, look, It doesn’t matter to me what happens because I feel like I can adjust to anything. I’m pretty flexible that way. And if the market goes down, I’ll try to crush it there. If it goes up, I try to crush it there, but manage risk as the first rule.
And it would not surprise me at all if this is, let’s say, the warning, the calm before the storm because September and October can be freaky months. And oh, by the way, I heard there’s something happening in early November in the U.S. between two candidates, maybe more.
RS: Yeah, I was just going to say just two? I think I’ve heard something about that too. So how are you – you’ve been on talking about your YARP portfolio. Is that the main thing you’re focused on? How else are you assessing the markets in terms of actionable ideas?
RI: Sure, sure. I think the best way to cover that, I think, is to briefly touch on two of the three strategies. Three children, I have two-and-a-half strategies, because one of them is fairly new. And just like with my kids, I kind of love them all the same.
But I think when I walk you through my positioning in the strategies, all three of them, and I think I’ll save YARP for last because it’s a longer conversation because that is kind of my main work, but I think you will get a much better idea, okay?
RS: Okay, hit it.
RI: Great, all right. So let’s start with the core ETF portfolio. And this is something that I have run really going back to the 1990s back when I was an advisor and also ran it as a mutual fund for a while. So it’s ETFs. It could be as few as five. It could be as many as probably 15 at a time is highly tactical, but it’s not like a constantly swing trading.
And I have to say it’s probably on the best run that maybe I’ve had with it. It’s basically gone up in a 10% straight line for about a year-and-a-half, despite all the market chaos. And when I look at the current positioning, I think, it pretty much tells you where I am.
So about 23% of that ETF portfolio, which has seven ETFs in it right now, two of those ETFs are equity-oriented. One of them is a dividend-oriented low volatility ETF. There’s about two-thirds of the equity exposure, so call it 15%. And about 7% or 8% is in an ETF that tracks the top 50 stocks in the S&P capitalization weighted.
Now, why is that important? Because to me, the equity market is, there’s two parts to the equity market. There’s the very largest stocks, most of whom are Mag 7 types and you’ve got Lilly and a few others in there and then there’s everything else. The average stock, and best way for people to look this up, the ETF, I don’t own this, but the ETF is EQAL. It’s the Equal Weighted Russell 1000.
So it’s the average – it’s the performance of the average of the Top 1000 stocks. (RSP) does the same thing for the SP 500. But to me, the more data, the better, the more stocks you can look at. So the average of the Top 1000 stocks over the last three years is right around the flat line.
So what does that mean for all of this buy and hold stock picking? It means to me that it is largely passe unless and until one of two things happens. We get a flushing in the market and resets all the valuations and everything’s cheap for the “long-term” whatever your long-term is or we muddle along like we have for three years and most stocks don’t really go anywhere and assuming their earnings and their revenues grow at least a tad, they will get cheaper. And eventually, there will be some value there.
But there isn’t a lot right now, but that doesn’t stop the Mag 7 types from re-rallying one more time, two more times. But ultimately, I think, it heads a lot lower, but I’ve stopped the game of trying to figure out when; I’m happy to make money with whatever is available to make money on the long side, on the short side, and as I say, playing offense and defense at the same time.
The other parts of core, they’re – really the biggest chunk of it, and this tells you a lot about how I’m thinking, 65% of it is in an array of four ETFs that all have one thing in common. They own U.S. Treasuries, all the way from one that owns one- to three-year T-bill – I’m sorry one- to three-month T-bills, all the way out to one that ladders, (GOVI) is the ticker symbol.
And for those who are trying to maybe simplify their bond exposure, it goes from one to 30 years and allocates about 3 and change percent to each year. And I kind of use it as sort of a baseline that I overweight parts of the curve.
But the fact that here I am, I guess, primarily an equity guy, even though I’m really more of a sort of a head strategist. The fact that I’m spending this much time analyzing the treasury yield curve tells you two things. One, that equities are high risk, but I’ll take the returns when I can get them. And right now you can get them, and we’ll talk about that in a minute with YARP.
And also that interest rates, and again, I’m a chartist, so I’m not interpreting every word out of the Fed. I’m looking at the charts.
And each week, it gets a little bit more compelling to me and more convincing that rates are going to go down, the one thing I’m not sure of is when is the 10-year treasury finally going to yield more than the two, because that re-inversion of the yield curve is likely what starts the real countdown to recession, which I think is inevitable, but again, I’m not going to try to tell you when.
And to me, options are like, it’s a very meat and potatoes approach, I call it. So in that core portfolio, again, 23% equity, 65% in that kind of T-bill to long-term bond, but treasury ladder, and there’s about 1% in total allocated to a pair of options related to the S&P. It might be on the S&P, it might be on (SPY), it might be on other versions of that, but generally, it’s a macro equity market, what they call long combination strategy and it’s a lot easier than it sounds.
So as an example, with the S&P sitting, got to look this up because again, when you’re a charter, you don’t care about the levels, you just care about the pattern. So the S&P is in the 5,400 neighborhood.
So what I might do if I was sitting down and starting this sort of last little piece of the core portfolio alongside the ETFs that are for equities and fixed income is, I want to hedge against major loss, ABL, avoid big loss, that’s my number one rule. But I also don’t want to miss out if the market goes parabolic and I’m only 23% in equities.
Well, I can use, at least lately, I can use not even 1% of the assets in my own core account and I can split them as follows. I can buy call options out of the money on the SPY. So if it’s a 5,400 and these are not actual examples, but it just gives you an idea.
So let’s say it’s 5,400 S&P. And I say, okay, I’m going to strike my options 300 points either way. So, 5,700 and 5,100, a call option that strikes at 5,700 and a put option that strikes at 5,100. And so if the market goes nowhere, that whole 1% probably evaporates. But that’s okay because I’m only risking 1%, position sizing in everything is something that I think is an unused or underused and underappreciated art in the community.
Everybody is looking for the next stock pick. And are you a buy, sell, or hold? I get that. But to me, it’s how much you own, not what you own, or at least they’re a lot closer than most people would realize.
So when you have that option combination or that long combination to round out a core portfolio of ETFs, if the market goes flying higher, which it’s known to do, well then the calls are going to dwarf in profit what is lost when the puts probably go to 0. And then the opposite case is true as well. And we just saw this, the put options in that portfolio, they didn’t carry the portfolio, but they made it.
So, I was able to make money when the market was kind of really sliding pretty quickly. And this was the key to what I was able to do to make money in 2020, when the market was down 33% in five weeks. I mean, the bottom line, Rena, is why not always be ready for something crazy to happen in either direction and you don’t have to budget a lot of your portfolio to do it.
And again, it’s kind of like adding wings to your portfolio where if the market was flying higher or it goes lower, you can do that. And not only am I doing it with options, but as you’ll see in some articles coming up, Seeking Alpha, I’m really embracing something I did not embrace for a long time, which is levered ETFs because even if you buy a very small position in a levered ETF, 2x, 3x either direction, you can only lose what you put up. And so they’re sort of option like in that way.
Macro tracks is my latest creation. So let’s do some simple math here. You up for some simple math? So, let’s take $100. And then, so we got $100 to work with. $80 of that goes into one-year T-bills as an example, okay? When I did this few months ago, I locked in a 5% rate, a little bit lower than that now, but they’re still very high.
So that $80 in one-year is going to be worth 5% more. So the 80 is going to become 84. The only reason it doesn’t is if I sell the T-bill or if the government can’t pay me, and let’s not even think about the latter. So the 80 becomes 84, but we started with $100, you and I, so we have another $20 left.
What we just did is we made it so that even if the 20 were to lose 20% and by the end of the year, the 20 became 16, the 80 became 84. So we can lose 20% of the rest of the portfolio and still breakeven on the $100.
I can use ETFs, levered ETFs, I can do some swing trading, things like that knowing that I can take some risks I wouldn’t normally take because I have sort of buttressed my portfolio with 80 going to 84 and the other 20 is where I maybe take outsized risks. So that’s macro tracks.
And to me, that’s really my answer to this sort of daily use of expensive and very complex principle protected buffer ETFs. There’s a use case for those, but you and I are talking mostly to Do-It-Yourself investors. And I think a simpler approach that anybody can do themselves and have control over is something to look at. I’ve written a little bit about this, but I imagine I will some more.
Okay, is it YARP time?
RS: It’s YARP time.
RI: Okay, great. So as a reminder, Yield At a Reasonable Price. It’s – it has a little TM after it. I think any week now it will have a registered trademark. The R with a circle around it, at least that’s what my attorney tells me.
YARP is something that I created several years ago. I’ve used it in various forms. How am I using it now? And how does it relate to the current market? Well, if you are a Seeking Alpha subscriber, and if not, why not? You can see that I started to write more articles about my individual holdings.
I also wrote an article a few months ago basically announcing that I created a portfolio of 40 stocks based on this YARP methodology. And YARP starts with a ratio, as we call it, the YARP ratio.
And what it does is it looks at the past seven years of dividend history for any stock that pays at least a decent yield. And it judges where you are from that range. So if a stock has consistently yielded over the last seven years between 2% and 4% and you’re at 3.8%, having just come down from 4%, well, that also means the price is probably edging up and it’s kind of putting a – it’s kind of putting, if you will, a fairway around your golf shot, if I can use that analogy, it keeps you in the fairway.
2% to 4% is the range, is close to the top. That means the stock’s probably pretty cheap. That it’s not like a one and done, okay? That is – it’s a ratio that is added to all the fundamental and especially quantitative and technical work that I do. I’m a big fan of the Seeking Alpha Equity Rating, it’s a big part of my screening process.
And what I did is I finally decided, okay, let me find 40 names, okay, and it might be 30 to 40. I might have some extras on the bench, on the sidelines, but the idea is I’m all about process.
So the investment process is to get a group of stocks that I feel like I can own at least 1% of for a while, at least a year, if not multiple years. However, what is different about YARP is that the position weightings change. Why do the weightings change? And I’ll give you a couple of examples of this in a moment.
Those stocks, every quarter, a few things happen with the stock. It goes up and down in price. It has an ex-dividend date that you know. It’s not like bonds where you make a little more income every day by – just by holding it by accretion. It has an ex-dividend date, you know when that is, and that’s when you get the dividend typically 4x a year.
The other thing that happens is it has earnings. So to me, ex-dividend date approaching good, earnings approaching bad, not because earnings are always bad for stocks, but because they represent blow-up risk and I’m risk averse.
So what I do with YARP, I started with that 40 stock portfolio, I’ve made some cuts, I’ve made some adds, but generally speaking, yeah 30 to 35 of the names are pretty steady. And what has happened is, I started this formally on the 1st of May, I believe. And I’m happy to say that in three-and-a-half months, the YARP portfolio is up 7%. And that includes 4.4% gain when the S&P dropped by 8% in three weeks.
So sort of a replay of the type of stuff that I’ve done as a portfolio manager in past cycles. And so how does that happen? Well, first of all, the secret weapon in YARP is also a put call option on the S&P or on the Dow or on the NASDAQ or on something that looks interesting to me and relatively inexpensive to put on. And so there’s always a disaster protection.
But what’s also happened in the market recently, and I think a lot of people listening to this are aware, is as rates fall early in a rate falling, I wouldn’t say rate cutting because they haven’t cut rates as of this recording, but as rates start to recede from where they’ve gone, the market’s impulse, the equity market’s impulse is to look at things like REITs and utilities that have higher than average yields and bid up the prices of those stocks, not because the company’s fortunes have changed, but because they have higher yields.
And look, there’s still plenty of institutional money that can only buy stocks. So if you can only buy stocks and you see that bonds are going up in price, then the stuff that has the higher yield is probably going to follow.
So REITs and utilities, they’re not as high as they were, but I’ve had some real successes, and I’ll get to a couple of names in a minute. But the main difference between the yield at a reasonable price equity portfolio that I run for myself and subscribers is that I do not look at a stock and say, oh, I own it good, I’m done, okay.
Every stock that is in here is something that I’m willing to own at least 1% of and no more than 5% of. But the key to YARP, and I’ll put some examples to it now, and I’ll give you a good one, International Paper (IP). It’s one of the ones I bought at the beginning and maybe it’s not the sexiest stock out there and, boy, has this stock price been all over the map.
But when I did my fundamental and quantitative filtering at the beginning, International Paper made the cut. Sorry, that was a really bad pun.
Look, I was not looking in and saying, oh, this is a great buy right now. Let me put a buy rating on it and write a Seeking Alpha article. No. I’m willing to own at least a little bit of it at any point in time, and I think this is what many of today’s dividend investors miss.
First of all, hedging the risk out the way I described before, but the big one I think people are missing is if you buy and hold, you’re going to get the yield you get. But what people often do is they jump to whatever is the highest yield. And that can really become difficult, especially if we have a bad credit cycle, which eventually we will.
So when you look at something like International Paper, I bought it in at a 3% position. Okay, again, it could be between 1 and 5. So effectively, it was like me giving it a – an okay rating, all right, like 3 out of 5, if you will, almost like stars.
And the stock moved up a little bit, started to get a little bit rich, pulled back to 1%, avoided a bit of a dip, was always conscious of when the ex-dividend date was, always conscious of when the earnings were, because as it approaches the ex-dividend date, okay, whether it’s days or weeks out, the better the stock looks to me technically, the more likely I’m to raise the position.
So I have been in International Paper between 1% and 5% at any point in time over the last three-and-a-half months. The stock is much higher now, but my return on International Paper is more than a buy and hold. It’s actually been the biggest contributor to the portfolio.
And other than that, it’s been things like Extra Space Storage, (EXR), which is a storage REIT; Camden Property Trust (CPT) and other REIT in a completely different sector of the REIT business, apartments; and things like Texas Instruments (TXN), which is, let’s call it a tech stock that nobody talks about anymore, right? I think we remember the old calculators and stuff. And so it’s things like that. It’s been REITs and utilities.
But the thing I want to point out is, and this kind of informs my market view. But really when it comes to YARP, I’m looking at every stock individually, although I can definitely discern trends from that. So I saw a few months ago, REITs, utilities, the whole bond market-related thing. And I was like, okay, I’m surprised maybe, but I understand and I see it in the charts that REITs and utilities are going to need to be dramatically overweighted in this portfolio, at least, for a little while.
So I’m trying to give you and the audience a sense that this is a fluid process. There is – it is extremely regimented, but rather than walk you through the quantitative mechanism in detail, which is probably better for a white paper or reading some of my articles, that’s where I go.
And if you like, I’ll finish with the Starbucks example, because it’s the freshest thing I have and again, not a pun.
RS: Yeah, sure.
RI: Okay. So here’s – and the title of the article that came out here in mid-August was “I’d Rather Be Lucky Than Good,” which is a – I’m all about self-deprecating humor, as you know, at least when it’s pointed inward to me. And the – so when it comes to Starbucks (SBUX), Rather Lucky, Be Lucky Than Good is something that was said by an old Yankees all-star pitcher in the 1930s.
But it applied here because, again, it’s like, what do they say? You have to be in the game to win it. So I had a Starbucks position. It was one of my 40. It was hanging out at a 1% position. It was just starting to show some signs.
Now I’m not a fundamental analyst, okay? Everybody else is watching what the activist investors are doing and all that. I see all that news, but to me, it’s like, show me the chart and show me a little bit of quant and give me a sense of what’s going on around the company and I’ll see.
And more importantly, Starbucks was four days away from going ex. And I looked at it, charted it and said, I don’t know if it’s going sky high, but it looks like it’s starting to tick up enough, so that I’ve got a little bit of cushion.
So instead of grabbing that dividend with 1% allocation in the YARP portfolio, I will grab it with 3%. And what happens the very next day, the announcement of the new CEO coming over from Chipotle (CMG), stock goes up 24%. And here not long before that happened, I mean, less than a day. I tripled my position in Starbucks.
Well, there was part of – that that was luck and that’s why the article was titled that. But part of it is and the bigger part of it, process, process, and process. Because my process got me to the point where I was willing to hold it and that my charting mechanism was at least signaling me that there was something good enough going on.
And so to summarize YARP, it’s a constant evaluation of kind of where things are in space. And that tactical rotation within each stock’s weighting and then among the weightings of all the stocks together. So my overall equity allocation, which sometimes is in the 80% range and sometimes it’s in the 50% range, technically, it could be 40 stocks at 1%.
So that to me is why I love YARP and why frankly, I’m angling most of my investment work and my investment communication, e.g. Seeking Alpha articles and such to YARP because enough people have said to me, yes, this is something that seems like nobody is doing, at least, not the same exact way.
And yeah, it’s not as tax efficient, maybe because the position sizes on the stocks are changing, but it’s not all about the dividend either. It’s a total return strategy.
And so while the dividend is probably aiming for about 7% to 10%, which sounds like a lot when you’re owning stocks that yield in the twos and threes and fours, but again, you can grab a lot of dividend if you’re using the technicals to position size and try to own as much of it as you can within limits when the dividends are paid and to soft pedal a little bit when the stock is getting technically expensive or when earnings are approaching. And that’s the YARP update.
RS: Rob, let me ask you this. In terms of laying out all these portfolio strategies, in terms of investors listening, is it – how do they know which one is right for them? Is it a matter of preference? Is it risk tolerance? Is it investing timelines? How should they be thinking about each strategy?
RI: The core portfolio was something – the core ETF portfolio is something that I created, well in its current form, over a decade ago. And the idea was, hey, bond rates are extremely low. We need a better way to produce what bonds used to do. And sure enough, I think it’s beaten, I just did this study like one-year rolling returns. And on average, it beats the ag bond over the last decade by like 2.8% a year.
So it’s clearly worked. But there’s some people that might look at it and say, hey, I like this, but I don’t want to hedge. I like the way Rob thinks on the long side, or I don’t want to use the options. And that to me, that – this is the wonderful new four years into it phase of my career where I’m telling people what I’m doing and then letting them decide how they want to use it.
So, core, it’s a little more basic. It’s a lower turnover, but there’s still plenty of turnover. And look, I mean, at sungardeninvestment.com, I mean, people know ETF Yourself, the other site which is, let’s say a little bit more like basics of portfolio construction and ETFs, but sungardeninvestment.com, I would say, is kind of where the puck is going for us.
And over there, I let people in and follow basically move by move what I make in the core portfolio and especially in the YARP portfolio. And that is also going to be the home of much more equity research where we can use that YARP score and the process. That is something that I’m doing more blogging and also a lot more, let’s say, private behind the paywall work at sungardeninvestment.com.
RS: Anything else you would say in terms of navigating these strategies in these markets? A question that comes to mind regarding the dividends is something that we’ve been talking about in the past few weeks.
Avi Gilburt mentioned that he first sees some dividend cuts coming because of what’s happening in the markets. How are you maybe thinking about dividends and maybe the various strategies in general, anything else you’d say there?
RI: Wow. What a fabulous final question. And I’ll tell you why. Because I – the whole reason, I mean, you talk about, well they say, burying the lead or burying the headline, okay?
The whole reason YARP exists and why I move more and more of my own money into it all the time is that dividend investing for retirees okay, I’m 60. Anybody who’s within 15 years of my age, probably 20 years of my age, dividend investing is not what it used to be. Companies don’t use the cash the way they used to.
They buy back stock, et cetera. So I think that many parts of, I would say, yield reaching dividend investing, which is the most popular way that people do it or dividend growth investing, to me at the end of the day, everything is about total return.
You can’t, as they say, you can’t eat relative returns, but you also can’t eat forever if you’re getting a 7% dividend every year, but you’re losing 10% a year in principle, ask the closed end fund crowd about that, so – and ask bond investors since 2022.
So to me, dividend investing has to be looked at as total return investing with the dividend as being a piece of it. But this Yield Hog thing, which I used to be a big fan of a long time ago, I think it’s kaput. I think it’s passe, it’s past tense, and it will be for the foreseeable future. And so that’s why I created and trademarked something to try to educate folks sort of from the ground-up and then put a process around it.
RS: Rob, appreciate this conversation. As always, looking forward to the next one. Leave any questions in the comments for future episodes and for Rob to answer. He’s very active, so why not take advantage of that?
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