Friday, December 6, 2019

Short Takes: Illusory Wealth, Tax-Loss Selling, and more

Here are my posts for the past two weeks:

Useless Activity

The Most Important Thing

Am I Fixing a Mistake or Making an Active Decision?

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand gives three potential sources of illusory wealth in the markets today. Along with his thoughtful commentary, he uses the great terms “bezzle” and “psychic wealth.”

Justin Bender goes into detail about tax-loss selling strategies. This stuff can get tricky. Fortunately, it’s only relevant in taxable accounts. Even people with million-dollar portfolios often don’t have enough in their taxable accounts to bother with tax-loss selling.

Dan Hallett says Bitcoin is for speculating, not investing. I agree (

Ellen Roseman says phone scams are on the rise.

Tuesday, December 3, 2019

Am I Fixing a Mistake or Making an Active Decision?

I recently discovered a mistake in my spreadsheet related to my fixed-income allocation during retirement. Fixing it will involve selling off a sizable chunk of stocks. But I think this may be more of an active portfolio decision than just fixing a mistake.

For years I’ve been striving to come up with mechanical decisions about how to handle my portfolio rather than making active decisions that amount to a form of market timing. One of my rules now that I’m retired is to maintain 5 years of after-tax spending money in fixed-incomes investments, including short-term government bonds, GICs, and savings accounts.

Poking through the spreadsheet that holds my mechanical rules, I noticed a problem with the 5 years of fixed income calculation. I didn’t factor in CPP and OAS pensions properly. I treated these pensions as though I’m receiving them spread out over my whole retirement instead of just getting them later in life. So, my 5 years figure is too low now and will be too high once I get into my 70s.

Fixing this on my spreadsheet immediately triggered a rule demanding that I sell off a big chunk of my stocks to boost my fixed income. So far, it just seems like simply correcting a mistake.

However, the reason I was looking at this part of my spreadsheet at all is because very high stock prices are starting to make me nervous. Because my fixed-income allocation amounts to a percentage of my portfolio size, the growth of my overall portfolio this year has triggered some shifts from stocks to fixed income, but I’ve been feeling like I want to shift even more out of stocks to protect against a possible stock market crash.

Ordinarily, I have these feelings and just ignore them with the help of my mechanical rules. But this time I have the perfect excuse to give in to my fears: an apparent spreadsheet error. However, it would be easy enough to defend the original calculation as sensible enough. I’m probably viewing this as an error because I really want to sell off some stocks.

In the end, I’ve decided to make the spreadsheet change and sell some stocks. But if I’m being honest with myself, I’m mainly doing it because of my possibly mistaken belief that the probability of a stock market crash has been increasing.

Monday, December 2, 2019

The Most Important Thing

It’s a compelling recommendation when Warren Buffett says “This is that rarity, a useful book.” He said this about The Most Important Thing: Uncommon Sense for the Thoughtful Investor, by cofounder of Oaktree Capital Management, Howard Marks. It turns out that “investor” in this book means active investor. The lessons on risk management and other topics are top-notch for those trying to beat the market, but passive investors won’t get much out of it.

One lesson for active investors is to seek out inefficient markets and be better than others at assessing value. This makes the S&P 500 a poor place to look for undervalued stocks.

Another lesson is that risk is the possibility of losing money, which is different from volatility. Risk comes mainly from high prices. Markets always seem riskier after they decline, but in reality, stocks are riskiest when their prices are highest.

To be a successful investor, it’s necessary to be skeptical. This means being skeptical of both too much optimism and too much pessimism.

While I don’t recommend active investing to anyone because very few investors have sufficient skill to expect to beat the market, anyone planning to pursue this path should learn the lessons taught by Marks in this book.