Journey to Generational Wealth Post #1 — Volatility & Bitcoin
- No matter how great the fundamentals are for the stock that you like, it matters little when VIX is this elevated.
- Thanks to Raoul Pal, Founder and CEO of Real Vision, and others that I’ve listened to over the past few months like Preston Pysh of The Investor’s Podcast, my target asset allocation on bitcoin recently changed from 4% (max commodity position) to 10% as I’ve taken a longer-term view on bitcoin as a reserve asset.
I have an ambitious goal to accumulate enough wealth to allow my family to have the freedom to spend our time doing what we want to do rather than working for a paycheck. I am documenting this Journey to Generational Wealth here so that I can look back and reflect on the progress I make, to hold myself accountable, and to share what I am learning along the way.
Each weekly post follows the same format — I will discuss what I learned this week through my reading or consuming content through Real Vision, Hedgeye, or any of the various podcasts that I listen to. Next I will go through my investment results for the week and my thoughts on each asset class or investment. I will also provide information about my current strategy, asset allocation, position sizing and the types of securities I invest in.
This is post #1 in the Journey to Generational Wealth series. Performance results will be tracked from this point forward, so no investment results are present in the post below.
What Happened This Week
It was a pretty rough week for most asset classes. The FAANG stocks drove the overall market lower this week, and volatility spiked (we had two days where VIX was up more than 20%). I am still very overweight cash and fixed income and underweight equities in my portfolio, so my losses this week were minimized. Several things looked like opportunities this week (i.e. tech stocks — especially TWTR) however with VIX and VXN around 40, I think I will wait to see what happens post-election day.
What I Learned This Week
The volatility spike and rising dollar were two things I paid particular attention to this week.
USD — Keith McCullough has been pounding it into the head of Hedgeye Nation that so many things are highly correlated to the dollar as of late — however, that correlation with the S&P 500 has been burning off recently. Gold and Silver did decrease as their negative correlation with the USD says they should. Bitcoin broke away from the pack and its USD correlation this week (and I have been adding to my bitcoin position consistently — having just upped my target asset allocation from 4% to 10%). I’ll continue to watch the dollar to inform other moves that I may make — I’ve listened to a couple of interviews with Raoul Pal discussing what he believes is the coming insolvency phase where we will get another period of deflation (just like in March) before we resume the longer-term dollar crash. That is something that certainly makes sense to me with all of the white-collar layoffs we are seeing now (see Exxon, Disney, Boeing, Well Fargo this week) and the government’s inability to pass any form of stimulus, much less one that actually helps the American people.
Volatility — VIX shot up 40%+ this week. No matter how great the fundamentals are for the stock that you like, it matters little when VIX is this elevated. This was on display this on Friday when the FAANG stocks were all generally down between 5% and 7%. TWTR also literally crashed — down over 20% — on disappointing user growth numbers.
Weyerhauser (WY), one of my current individual equity longs, reported earnings on Friday. WY beat earnings and was up 33.3% from PY EPS, up 26.3% in net sales, and up 141.9% in adjusted EBITDA. Remind you, these are all over same period PY numbers, not Q2 earnings numbers that included an economic shutdown (like our fantastic GDP number that was the largest increase in history but still nowhere near where it was 1 year ago). WY also reinstated their dividend and added over $100 million in cash to the balance sheet while reducing debt. So what happened to the stock on Friday? Down 4% on a top-line revenue miss. 4Q estimates for EPS, Sales, and EBITDA are lower than 3Q actual, but that is nothing unique to this year (historically lower due to seasonality). All in all, WY will finish 2020 with a stronger balance sheet and higher earnings/EPS/EBITDA than the prior year. The stock however, is now down 6.6% YTD after the 4% decrease on Friday.
Bitcoin — I listened to a couple of RealVision videos from Raoul Pal this week discussing the case for bitcoin. This video in particular really got me thinking about increasing my asset allocation to bitcoin:
So, thanks to Raoul Pal, Founder and CEO of Real Vision, and others that I’ve listened to over the past few months like Preston Pysh of The Investor’s Podcast, my target asset allocation on bitcoin recently changed from 4% (max commodity position) to 10% as I’ve taken a longer-term view on bitcoin as a reserve asset — and one that can potentially 10x in the next 5 years.
Investment Results Weekly Update
I will begin tracking investment returns from November 1, 2020.
I’ve had a bit of capital on the sidelines lately due to volatility spikes and dollar strength that we’ve experienced for a few weeks. I am slowly looking for good opportunities to buy — especially in gold, bitcoin and silver — to build my positions back up to my target asset allocation for Quad 3. So while I am under target on equities, gold, bitcoin and commodities at the moment, I am actively working to build them back up to where I want to be. I am near 10% bitcoin in my taxable portfolio, but am down around 3% in my larger, tax-advantaged retirement accounts, so I am looking for opportunities to buy GBTC in my retirement accounts. I also went heavier into fixed income in September/early October when the dollar was strengthening, and am now working to bring those positions back down.
Equities — I am continuing to look for buying opportunities in emerging markets since volatility is still very elevated in the U.S. KBA, CHIQ, and EEM are 3 ETFs I have been looking at for buying opportunities. Gold Miners (GDX) is another ETF I am watching closely to purchase on red — with the increase in gold prices and decrease in interest rates over the past 6 months, gold miners are primed to have some very strong results over the next few quarters. I will keep an eye on XLK and QQQ and will build a position if volatility can break down a bit from here.
Fixed Income — Corporate credit is not a great place to be in Quad 3, so I am pretty much limiting myself to treasuries at this time. I am buying TIPS when opportunity presents itself. I have moderate positions in SHY and TLT.
Gold — Gold and gold volatility have held steady over the past couple of weeks. I brought my gold position down to roughly 8% in September and am working to build that back up when gold presents buying opportunities.
Bitcoin — Bitcoin has been ripping upward in the last couple of weeks. I find it mentally difficult to buy GBTC due to the high premium associated with it, and GBTC outpaced actual bitcoin in percentage gains (increasing that premium) this week. I do not trade the bitcoin I have through Coinbase, but will trade GBTC (in my retirement accounts to avoid tax issues) when the premium gets out of whack in either direction.
Commodities — I only have one commodity position as of this week — silver which I built to max position on the drop during the middle of this week.
My Strategy
Having recently established a solid personal finance foundation to build upon, I am now building my “freedom fund”, or my investment portfolio that I have a goal to turn into a portfolio of income generating assets (dividend paying stocks, real-estate, fixed income, annuities, etc.) and reserve assets (gold, bitcoin, etc.). I will also plan to reserve a small portion of capital for higher risk investments.
My freedom fund includes employer sponsored retirement accounts, traditional and Roth IRAs (excluding a portion of Roth IRA that I consider to be my emergency fund), individual brokerage accounts and a Coinbase account. My freedom fund does not include my kids college savings accounts (529 plans) or my health savings account investments.
My short-term goal is to grow this capital through investing to the point where I can begin to use a portion of it to make larger purchases of assets that will generate income (real-estate, businesses, etc.). I am a Hedgeye subscriber and use their mathematically-based process to inform my investment decisions. Find out more about Hedgeye here: www.hedgeye.com
Asset Allocation
My current portfolio is positioned for “Quad 3” which is an economic environment of slowing growth and rising inflation. In this Quad, certain equity sectors tend to perform well along with inflation protected securities, gold, bitcoin, and other commodities. I weight my portfolio heavier to gold, commodities and bitcoin in this Quad than in any other. My target Quad 3 asset allocation is as follows:
Position Sizing
I size my positions based upon risk. No individual equity position ever exceeds 6%, no single fixed income position ever exceeds 10%, and no individual commodity ever exceeds 4%. These max position sizes are recommended by Keith McCullough at Hedgeye Risk Management. As mentioned previously, I view bitcoin as a reserve asset (I’ve become convinced of this view by Raoul Pal) which is different than Hedgeye (Hedgeye views it as a commodity). Bitcoin typically performs well in Quad 3 environments, and since I am currently in growth mode I am ok with taking on a bit more risk by allocating more capital than I would otherwise to this asset class. Keith McCullough also limits his gold position to 12%. I keep a 10% core gold position in all other Quads, and with Quad 3 being very favorable for gold I increase that to 15%.
Trading Strategy
I tend not to short stocks or sectors very much, but will short things from time to time by purchasing options (at the money puts) dated anywhere form 45–90 days out. As a Hedgeye subscriber I do follow their process by doing some trading around my target asset allocations based on the risk ranges, signals, and volatility premiums/discounts. I only do the short-term trades around positions in my retirement accounts to limit the tax implications of the short-term trades. This does not stop me from getting out of positions in my taxable accounts if the intermediate to long-term outlook of an investment changes. Depending on where I am purchasing a security in its risk range and what asset class I am investing in, I will make purchases of anywhere from 25 basis points to 200 basis points of my total capital at a time. For example, if an equity is in the middle of its Hedgeye risk range and I am making a purchase, I will make purchases of an amount equal to 25 basis points of my portfolio at a time. However, if a significant buying opportunity presents in gold at the low end of its risk range, I may go up to 200 basis points for a purchase, subject to my max position sizing limit (i.e. I won’t go over 15% total allocation to gold in Quad 3).
Investments
While I do invest in individual company stocks, I mainly utilize ETFs to invest across asset classes. These are typically the ETFs that Hedgeye follows. For equities I use sector ETFs like XLK, XLRE, XLU, GDX. Some of the individual equities I am currently investing in include NTR and WY. I invest in fixed income through ETFs like TIPS, TLT, LQD, SHY, IEF. For commodities I use ETFs like DBA. For gold and silver I use the Sprott Trust products PHYS & PSLV because of the inherent tax advantages (which are not really relevant in a tax-advantaged retirement account). I do not yet have enough capital outside of my retirement accounts to purchase physical gold and silver. For bitcoin, I buy on Coinbase and through my retirement accounts I buy GBTC.
Do Your Own Research
I feel obligated to let you know that I am not a registered investment advisor. Nothing above should be taken as investment advice. Please do your own research before investing.
The Life CFO Blog
A tThe Life CFO, I share my personal financial management framework, the tools I use to manage my finances, and what I have learned through reading the best books and listening to the smartest minds in personal finance and investing. I am a trained CPA and have always been passionate about learning as much as possible about finance and investing. See more posts here: www.thelifecfo.com.
Originally published at https://thelifecfo.com on November 1, 2020.
