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05 January 2022


The Estonian Fox

George, what's missing in truly modern portfolio management is a term accounting for the possibility of the government confiscating your returns, or your principal. Liberals want a higher tax rate (called confiscation), and Cherokee-of-the-month Ms Warren wants some of your capital itself. Sure, but they promise only if your wealth is above $1B. That's just in the U.S. And we ignore China and its ability to do whatever the CCP wants to do. China's stocks are held by quite a few Americans through mutual funds.

Few portfolio managers include an inflation risk due to the federal govt. printing money and adding to the country's debt. Neither the left nor the right have voted to contain spending ever.

I find it disturbing that the Federal Reserve accepts 2% inflation as a given. That means they intentionally reduce your perceived wealth by 50% over your working lifetime. Prof. Mark Perry has a graph showing the 'expertise' of the Fed since its inception in 1913. https://www.aei.org/carpe-diem/monday-afternoon-links-all-graphic-edition/

Chart of the Day V shows that for more than a century from 1800 to 1913 prices in the US were relatively stable based on Federal Reserve data. But since the creation of the Federal Reserve in 1913, its monetary policies increased the CPI by 27.5X, decreasing the value of the US dollar by more than 96% in the process. How is that helping?

Capitalism requires many small skills to deliver the goods or services. Currently, our education system has trouble providing the 3 R's. Who will provide the remaining letters in the capitalist's alphabet - like transportation; machining; ditch-digging; drafting? So far, it's been the skills of smaller entrepreneurs doing that on their own. But we saw what happens to small companies when a pandemic arrives.


..as the world's worst stock investor, I've always been nervous about any portfolio theory. A lot of the market appears to be in lockstep due to govt-encouraged tax-deferred trading (continuous inflows into index funds via IRA/401(k)). A lot of it is managed by over-powerful firms that can drive money to themselves or receive bailouts (BlackRock and the like). A lot of it is magic (machine trading). Any particularly successful theory is smothered by other people piling on.

Of course, anyone who became a stock true believer in the mid 1980's looks like a genius now. Things stay the same until they don't. It's like Taleb's story of the coin-flipping expert, one of many, who ends up flipping heads many times in a row. The financial press came to his door looking for hints on coin flipping.

Rather than hedging stocks against each other or building some sort of lower risk world by mixing stock risk v. reward, I'd prefer to see asset management that used stocks as a monolith (overall market fund?) with other assets as equals in the mix. Real estate for example. It's probably old fashioned, but physical ownership seems more comfortable rather than numbers in an account.

Given the death of small business and small farming in this country, I admit that the casino is one of the few areas for sopping up capital with (hopefully) some return, but I can't say that I like it.

George Rebane

The thoughtful comments of Messrs Efox and scenes are much appreciated. While they may well understand the different functions of asset performance prediction and portfolio design models, I fear that the average will continue to confuse the two. This motivates me to write a short pithy addendum to the above piece - soon.


"This motivates me to write a short pithy addendum to the above piece - soon."

I was mostly making the point that I think that the financial markets, as a whole, can be thought of as a single point of risk. I rather hate seeing the entire country's retirement hopes pinned on that one thing (with the exception of gubmint employee pension plans backed by guns). In fact, typically only the US financial market. Obviously, anyone who had to get out of the way of the Red Army appreciates risk more than most.

Bill Tozer

“..as the world's worst stock investor, I've always been nervous about….”— Scenes.

I have much to say on the topic, but in a nutshell, my wealth accumulation days are over, albeit I am still creating wealth as a by-product. I am not a stock picker and when I was, it was like going to the casinos and coming back talking about winning 900 bucks… but failing to mention all the times I came back a big Loser, with the gas tank on fumes a more credit card debt.

I feel compelled to clear up any misconception that I am a tax cheat or gaming the system to say that the reason I am considered ‘po folk’ is because all my income is tax free, State and Federal. Basically all income for the near future…until 2030. Then I will raid the dividends on the stock side, then if need be, cash out the REITs, but do not welcome the idea of the capital gains tax due that will be one-two hundred thousand dollars. I just don’t want to cut that check to Uncle Sam and Gavin Newsom…so let it ride.

I am in the period of my life where building up the nest egg is less important than tax avoidance. So, with my little Social Security check and all income being tax free, on paper I qualified for that $600 check from the State. They must go by income tax filings cause it surprised the heck out of me…and I felt it immoral and still do. No, I refuse to accept food stamps or discounted PGE or any aid….at the present. Nor am I interested in growing the wacky tobaccy plant. I have three portfolios. Stocks, Minis, and Real Estate investment private equity trusts.

It’s the minis that have shocked the living daylightsout of me. It’s worthless advice now with the interest rates in the crapper…but timing is everything. The munis are so boring and unexciting, but they have turned out unintentionally as the bees’ knees for me. And the munis are the smallest of the three portfolios..by far.
My munis are ALL invested in school bonds. Yep, staggered school bonds and as they are reaching their maturity this decade. Still paying 5-6-7 percent, free of state and federal taxes. When Stockton went bankrupt, they never once defaulted on school bonds. I don’t care if it is liberal Marin County or ultra blue Contra Costa County or Berkeley School District….those places may have their financial ups and downs like all cities and towns, but never will miss an school bond payment. Sad to see one bond expiring in 2023. It has been paying 7.1 percent, lol. Another paying 6.9% matures in 2026. I will miss them.

It’s not how much you make, it’s how much is the net. Tax free is like a 20-30% increase in revenue. Each year more munis will reach maturity and I have no idea what I will do next. Ain’t buying any new ones, for sure. I

**When I said All my income is tax free, there are always exceptions. Figured I would get hit with a $3,500 tax when I ordered some rebalancing of the stock side last year. But, nooo. That Standard Deduction of 10k or whatever it is absorbed all that. I don’t need keep tabs or receipts for deductions cause the standard deduction is fine.

**It was important to me (and me only) that I clarify why I am pro folk….and legally so in the eyes of the IRS. With inflation, I will be losing wealth…on the bond/cash side for sure. It would be one hell of a lot worse if I had to pay taxes on it. That would be adding insult to injury.

I will discuss the portfolios theories later. Again, since I am not building up the nest egg intentionally right now, I feel unqualified to say much more. I am a John Vogel fan and still am…when I was managing my own portillios for years to save that 1-2 % fees of having managed funds. An good Vanguard index fund cuts the expenses way down, except you really start saving on expenses with a bigger buy-in. Think I was eventually paying 9 cents per thousand in an annual fees, maybe 9 cents per hundred. A penny saved…

A unmanaged no load index fund is designed to pert near match the market, not beat the market. And with all those expensive high flying big name managed accounts out there, the index beats them 6, 7 times out of ten.

After years of research and knowing what I know now, my stock portfolio, including many mutual funds along with many individual stocks, are now being actively managed by one of those expensive big boys names with fees! I simply lost interest in it. Took too much time and rent in my head.
I do not even bother to look at the market or do any research. Sometimes I don’t even read the monthly statements. It’s all on automatic pilot. As Will Rogers quipped, ‘the return OF my investment is more important that the return ON my investment. Will Rogers is probably wrong considering today’s inflation, taxes, management fees.

Good article, Dr. Rebane. If I had an investment club like you, I might be really digging down into it. Right now I enjoy not even bothering to follow it…just as long as that tax free income comes in every month. Later, when that is gone, I will have to participate in my own financial welfare again. The SS checks pays the mortgage, taxes, fire insurance and car insurance because, like many, I went out a bought a house in my later years. My heart bleeds for those folks who bought a home with a few thousand down (like me) in their later working years and now have $150-300 bucks to live on each month. A $600 propane bill would set them back for months of scrimping and eating more beans and rice.

I know many and after SS takes out for Medicare, they are screwed. But, there is no place like home


"that $600 check from the State."

So it's real? I was going to throw it in the trash along with the offers for appliance warranties.

Sweet. Count me in the minimize income camp. Lotsa benefits for the poor out there, from cheap PG&E to cheap health insurance (thanks Obama!) for the sub 65's.

Non-asset based benefits are a weird beast, but guys like Mr. Paul have convinced me that everyone is in it for themselves from here on. I have no interest in paying for Team Blue hobby projects. The American Dream and patriotism are dead ducks until we can form something new and fresh.

It seems to me that the most practical act of morality, concerning money, you could perform is in the form of a will. Steer the bux to something of lasting value.

Bill Tozer

@ 12:33 pm

‘The legacy’ is what I call it. Once one’s revenue source reaches a point where you can’t spend it all after covering expenses, then either start giving it away or stick it in a will.

Note to self again for the umpteenth time: Get off your lazy butt and find a good estate lawyer before I unexpectedly kick the bucket and the State (or County ?) hires a shister to divide it up and grab 30% off the top for expenses…while dragging it out for a couple of years.
That would really chap my hide…almost as bad than finding out I am a active registered Democrat voter long after the worms crawled in, the worms crawled out. A will is part of money management and speaks my words when, like ole John Brown, am rotting in the grave…or out in the back forty. Anybody hear from Biker Bill lately? :). What’s that smell down in the canyon? A will is words from beyond the grave. No marble orchard for me. Too expensive and a frivolous waste of money. We must be frugal (but not stark) and prudent with what will be other people’s money.

Besides, I will just probably catch Covid or Legionnaires or E Bola if I went on cruise to exotic places.

George Rebane

BillT 121pm - After getting the same recommendation from multiple respected sources, we changed from our SoCal attorney to local estate attorney Richard Keene (530-477-2281). We have been very happy with his knowledge, advice, work product, and professionalism.

Bill Tozer

Thanks Dr. Rebane. I am now ready to cut the check to some Estate Attorney that is worth his weight in gold in knowledge and experience. The time has come.

Oh, had a question from the Jo Anne part of Scattershots. Does she also keep track of all the birthdays of the grandkids and friends? I bet she does.

George Rebane

BillT 209pm - Indeed she does Mr Tozer, as one of the many hats, besides Finance Manager, that she wears (I'm in charge of income, she handles all the out-gos.) I am a kept man, flaneur-in-training, and still blessed in our 60th year.

BTW, there is no more 'investment club'; the Rebanes have been Lone Rangers with our portfolio for many a year now. As successful entrepreneurs, we have some high tax bills.

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