Friday File: Inevitable Collapse and the Story of Progress

by Travis Johnson, Stock Gumshoe | March 3, 2017 3:41 pm

Some big picture thoughts on "what has to happen"... plus a new mutual fund to consider, and some minor updates

I spent last week vacationing in Sarasota, Florida, near the old stomping grounds of one of my favorite authors, John D. MacDonald… so I ended up re-reading several volumes of his Travis McGee series as part of my vacation escape from the world.

But MacDonald always included some social or environmental commentary in his novels, so one can’t escape the world entirely… and one bit really caught my eye that I thought worth sharing with you. This is a bit of commentary from McGee’s friend and neighbor Meyer, a wise and hirsute economist who also spends much of his time lolling in the Florida sun:

“These are bad days for an economist, my friend. We have gone past the frontiers of theory. There is nothing left but one huge ugly fact. There is a debt of perhaps two trillion dollars out there, owed by governments to governments, by governments to banks, and there is not one chance in hell it can ever be paid back. There is not enough productive capacity in the world, plus enough raw materials, to provide maintenance of plant plus enough coverage even to keep up with the mounting interest.”

“What happens?” (McGee responds) “It gets written off?”

He looked at me with a pitying expression. “all the major world currencies will collapse. Trade will cease. Without trade, without the mechanical-scientific apparatus running, the planet won’t support its four billion people, or perhaps even half that. Agribusiness feeds the world. Hydrocarbon utilization heats and houses and clothes the people. There will be fear, hate, anger, death. The new barbarism. There will be plague and poison. And then the new Dark Ages”

“Should I pack?”

“Go ahead. Scoff. What the sane people and sane governments are trying to do is scuffle a little more breathing space, a little more time, before the collapse.”

“How much time have we got?”

“If nobody pushes the wrong button or puts a bomb under the wrong castle, I would give us five more years at worst, twelve at best. What is triggering it is the crisis of reduced expectations. All over the world people are suddenly coming to realize that their children and grandchildren are going to have it worse than they did, that the trend line is down. So they want to blame somebody. They want to hoot and holler in the streets and burn something down.”

“Whose side are you on?”

“I’m one of the scufflers. Cut and paste. Fix the world with paper clips and rubber bands….

“It comes down to this, Travis — there are too many mouths to feed. One million three hundred thousand more every week! And of all the people who have ever been alive on Earth, more than half are living right now. We are gnawing the planet bare, and technology can’t keep pace with need.”

That wallowing pessimism was not unusual at the time, and it’s frankly not that unusual now — it sounds quite a bit like much of the doomsaying that came out of investment newsletters in the 70s and 80s, and then again in the leadup to the financial crisis and the aftermath.

Those words from John D. MacDonald were published in 1979 in his book The Green Ripper, and it wasn’t an economic or investing treatise — it was an adventure story about one of the world’s great boat bums who happened to be just about to take revenge on a radical terrorist group. It was the eighteenth book in the 21-novel McGee series, and, if you’d like a bit of trivia, it was the only book to ever win the National Book Award for hardcover mystery (OK, only because that category only existed for a single year… but still). The point is that it was a mainstream book and a bestseller, and the notion that the world was just a few years from a tailspin into destruction was and is a popular and logical sentiment.

But that’s what it is: a story. That’s what every prediction of doom is. Humans are storytellers, and we are hardwired to see threads of beginning, middle and end in everything — and to see cause and effect and chains of causality and sensible threads of logical progress in everything, to have life and history make sense the way a pre-planned story makes sense… but we’re also hardwired to see ourselves as being at the edge of possibility. No one works as hard as I, so how can humanity work harder in the future? Things are so efficient now, we’ve wrung every bit of goodness from the world, it can only get worse from here. My education/upbringing/faith/philosophy is the only thing keeping the wolves of anarchy from our door, and if it gives way to different ideas the collapse is inevitable. These threads come up in conversations and stories and political or market opinion all the time.

I don’t bring this up because I think we’re on the verge of collapse right now, though the broad stock market is obviously “on the expensive side” in comparison to historical averages — nor do I insist that people should have been optimistic about short-term prospects for the world in 1979, when we were on the leading edge of a nasty recession and during a time of high inflation and political turmoil (though I was ten, so I didn’t care). I mention it because those stories still make just about as much sense now as they did in 1979, or as they did in 2006, or 2011, when stories about the “End of America” and an inevitable implosion and a collapse in “our way of life” were everywhere.

And yet, progress continues.

There are many fewer people living in real hunger than there were 38 years ago when that book was written… and many fewer living in absolute poverty as well. And that’s not just “a smaller percentage”, most of the numbers are better in absolute terms as well. Despite the fact that the world population is around 7.5 billion right now, the number of people in abject poverty or hunger is lower than it was when the population was around 4.5 billion 40 years ago — depending on the measures you use, the last 200 years have seen the share of the world population living in absolute poverty (less than $2 per day, in 1980s US$ adjusted over time) drop from above 90% in the early 1800s to about 60-70% in the 1950s, then 40% or so in 1980 and roughly 10% today, in no small part because of improvements to agriculture and the food supply and, yes, globalization that has brought factories and jobs to some of the poorest corners of the world.

The boat has not risen equally for everyone — the very wealthy and the very poor have seen their lot improve more than anyone else’s over the last 40 years… and it may not seem like much of an improvement for the very poor. It certainly doesn’t seem like a lot of improvement for those who are in that top tier of the global middle class but feel like the downtrodden because they live in a nation of so many millionaires. Everything is relative, and it’s relative to the life you’re living and the story and the arc of history that you see — but any description of the arc of history that implies that somehow things have been getting worse over time or simply cannot improve further sells humanity short. Things have improved, almost all the time and for almost all the world over the last 200 years, and, as the traders say, “the trend is your friend.”

Sometimes implosions do happen, and sometimes specific things are so unsustainable that they do hit a logical end, like the popping housing bubble and its intertwined debt obligations that brought the market crashing down in 2008 and certainly hurt some regions and communities much more than others. Sometimes they’re even foreseeable, as some investors foresaw the housing collapse and the daisy chain of financial failures that would likely follow, but the sense of a story and a deep need to see a logical rising and falling of things means that a great many more collapses are predicted than actually come to pass.

And that, in the end, is my biggest quibble with most of the forecasts of doom that we see pretty much each month of each year from one soothsayer or another, most of them peddling books or newsletters with the full knowledge that bold predictions sell much, much better than wishy-washy chatter about worry or caution.

The predictions of doom read as eminently logical, in the main. They are good stories. They inspire worry that seems very much to make sense. There is data that supports those opinions (as you can find data to support most any assertion).

But they depend on an assumption that we are all-too-happy to jump to: That global markets, or even small specific markets, will follow our logic. That our horror at a massive debt, be it personal or governmental, somehow means that this debt will bring a horrible cataclysm upon us within some 18-month period that we can predict.

The economy today is in far better shape than the economy of 1979 or 1980, but the debt level in almost every corner of the world is also far more frightening — at that time, we were really just about to begin the biggest deficit spending party since World War II, as President Reagan urged military spending as stimulus… today, we’ve just about climbed out of a long period of massive deficit increases following the financial crisis and, if President Trump’s priories are followed, we’re on the cusp of again ramping up governmental borrowing. And yet the world has steadily, for more than 30 years, lowered the cost of debt.

This consistent arc of progress ends someday, we have to believe. There will be a reckoning, perhaps because the world is built on debt that can’t continue forever… as it was based on an unsustainable and irrational level of debt in 1980. But note that word: “Believe.” We don’t know anything, but we feel like it must end… we feel like things aren’t logical and so therefore they must change, that we must be just around the corner from a huge correction because the world does not match what we think makes sense.

That way leads to madness, I’m afraid. None of us are going to do well by betting on the future direction of the world or of giant macro events — that is the ultimate hubris, that those of us who can’t remember where we left our glasses are somehow the only ones who can see the logical future for an incredibly complex and interconnected global economic system with clarity… that we can predict, even within a vast margin of error of a few years, the logical end of this bull market, or this economic expansion, or this currency’s dominance, or this modern way of life.

If you’re reading my words here you’re probably an individual investor, and building up a nest egg to support yourself or your family or create or sustain some financial security in the future is your job.

Don’t confuse that by building a story.

Don’t bet on your ability to predict the future.

Use your brain for the things that it’s probably much better at doing — Choose and invest in sensible companies that are well-managed and generating profits and seem to be in markets where growth in those profits is a reasonable expectation.

And for God’s sake, invest in humility — I like to call this “diversifying away from myself”… whenever I feel certain about what’s likely to happen to the market or the economy, or, frankly, even for a particular stock or speculation, I try to step back and take solace in putting some of my investable assets effectively out of the reach of my dumb and emotional forecasting, mostly by putting it in reasonable, low-cost and diversified funds that will keep up with, or hopefully beat by a little bit, the historically excellent long-term performance of large corporations.

Picking stocks is fun, and it can be profitable and successful, even for small individual investors… but we have to be very aware of our limitations, and of the fact that we are very likely to work against our best interests when we start to feel good or bad about a stock or a day or a month or a quarter, and especially when we start to be certain that we can see the future. The evidence is pretty overwhelming that investors who move in and out of investments on the shifting winds of sentiment lose.

These two charts from Blackrock should probably be hanging on the wall of every investor’s office, right above the screen you look at when you’re itching to trade something — the first one is a description of the emotions that most investors feel as the stock market rides up and down:
What should that tell you?

Well, first of all, that emotions are the enemy of stock market returns — but that’s pretty hard to dispute and you already know that.

More importantly, it should help us remember that times when we feel panic and defeat are the best times to at least stay invested, and preferably increase your investments in stocks (all else being equal, of course — that doesn’t mean a 70-year old person drawing down 5% of their portfolio every year for living expenses should be going all-in on stocks next time the world panics). It might also tell you that when you’re feeling euphoric, as seems to be the case for much of the market today, is a good time to let the cash build up in your portfolio a little bit… buying when you’re worried generally pays off faster than buying when you’re thrilled, assuming that you’re intending to hold those investments for ten or twenty years or more.

Of course, I may worry more than most people — sometimes it feels like I’m perpetually at that “Worried” or “Cautious” stage.

And the second one, much more important, is an illustration of the average annual returns of the stock market, the bond market, etc. That number on the left, the 8% or so a year, is what we are conditioned to expect from long-term stock holdings over time, and that and the somewhat lower returns for bonds and gold have been pretty consistent, and most broad and diversified exposure to those asset classes has done roughly that well for a long time.

But look over at the number on the far right… that’s how much they calculate that an average investor’s mutual fund portfolio actually goes up over that same time period. According to studies by Dalbar over the past 20+ years[2], it’s clear that the average investor’s decisions to buy, sell or switch mutual fund holdings work against him with remarkable consistency. Or, in their words, “the results consistently show that the average investor earns less – in many cases, much less – than mutual fund performance reports would suggest.”

Which means that the average mutual fund investor during the past 20 years probably lost money on an inflation-adjusted basis — not primarily because of high fees or bad funds (though both are also drags, of course), but because they bumped their money in and out of the market, or in and out of specific funds when their sentiment changed.


That’s only 20 years, but investor psychology has probably been similar for most of history. And I would assume that the numbers will get worse in this regard, not better — after all, in 1995 you actually had to call your broker to request that funds be moved from one mutual fund to another, and pay fees on it, and maybe even get talked out of it… today, you can pop in and out of sectors and stocks and funds dozens of times a day if you like, without any effort at all, and without anyone ever tapping you on the shoulder and saying, “um, what the heck are you trying to do?”

One excellent counter to either short-termism or pessimistic thinking, neither of which tend to lead to entrepreneurial success or to compounding a portfolio of investments, is Warren Buffett. He has been blessed by a lot of things in his long life, but one of them is certainly a long-term and unshakeable confidence that high-quality businesses that can turn a profit and continue to invest and grow for long periods of time will compound value at a tremendous rate if you just, for the most part, leave them alone. And if you can avoid screwing around with speculative stuff, or predicting stock market success in any given quarter or year for the next hot thing, your odds improve markedly. If you haven’t read his latest investor letter that came out last week in Berkshire Hathaway’s annual report[4], go do it.

Right now, if you can. I’ll wait.

OK? And if you haven’t read the last 20 years or so of his letters[5], that’s worth doing as well. The one thing we really have control over as investors is our own mindset, the more you read rational thought and analysis and avoid fear-mongering and clickbait headlines or CNBC stories about the end of the world or a market crash that someone is predicting in the next couple months, the better off you’ll be. There’s always someone predicting calamity.

Here’s a little excerpt from Warren’s letter:

“Our efforts to materially increase the normalized earnings of Berkshire will be aided – as they have been throughout our managerial tenure – by America’s economic dynamism. One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers….

“It’s true, of course, that American owners of homes, autos and other assets have often borrowed heavily to finance their purchases. If an owner defaults, however, his or her asset does not disappear or lose its usefulness. Rather, ownership customarily passes to an American lending institution that then disposes of it to an American buyer. Our nation’s wealth remains intact. As Gertrude Stein put it, “Money is always there, but the pockets change.”

“Above all, it’s our market system – an economic traffic cop ably directing capital, brains and labor – that has created America’s abundance. This system has also been the primary factor in allocating rewards. Governmental redirection, through federal, state and local taxation, has in addition determined the distribution of a significant portion of the bounty….

“Early Americans, we should emphasize, were neither smarter nor more hard working than those people who toiled century after century before them. But those venturesome pioneers crafted a system that unleashed human potential, and their successors built upon it.

“This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history….

“American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that.
Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.

Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.””

So what does yours truly think about things right now, in case you’re foolish enough to want to know? Well, there are a few minor updates on the companies in which I have investments and speculations (and follow for you in my Real Money Portfolio), and I’ve got a little follow-up for you on one of the mutual funds that I like (and another one that’s following in its footsteps).

Interest rate sentiment has been drifting higher again, particularly on the short end of the yield curve, thanks to the increasing likelihood (near 100% now, traders bet) that the Federal Open Market Committee will raise rates by a hair when they meet in a week and a half… which is good, because that hawkish sentiment is based on improving economic fundamentals and an inflation rate that’s tickling closer to the 2% level the Fed would like to see. That has helped to support the dollar, and positive economic sentiment, along with the fact that President Trump was able to get through his address to Congress earlier in the week without being childish or petty (and without taking a break in his speech to Tweet), has helped to boost stocks in general as the optimism party rolls on.

That has kept my portfolio rolling along nicely, as one would expect, but in addition to pressuring some of my more interest-rate sensitive holdings a little bit (like a couple REITs), it has also hurt gold… the regular pattern of “dollar up, gold down” seems generally to be still with us, and most of my gold stocks took a solid 10-20% drop over the last couple weeks as gold has dropped 2-3% from recent peaks (and the speculative positions, particularly levered ones like options and warrants, fell much more drastically — as should be expected). There hasn’t been any notable news that caused me to change my thinking about anything in the portfolio… and, of course, gold is nowhere near as predictable in the short term as enthusiasts would like to believe — the price of the metal itself has had 20-30% climbs and 20-30% drops in just the last year or two sentiment has shifted up and down, but at the moment it’s right about where it was twelve months ago.

I still like physical gold as a store of value and insurance against currency crises, and I still like gold royalties and streaming as a leveraged and compounding bet on gold and little explorers or special situations in gold mining as risky speculations with tiny parts of my portfolio… but if the 10-year bond is trading with a 3%+ yield in six months, driving the dollar still higher, probably gold will be lower than it is now in dollar terms (and, for most of us living in the US, “in dollar terms” is what really matters). And if there’s some sort of real existential currency or economic crisis that hits the world, there’s every chance that the metal itself will be much more resilient than mining stocks… miners are not really where investors run in a panic, and they’re not generally a “store of value” like gold bars or coins may be — the mining business in general is too terrible, dirty, difficult and wasteful to be a store of value or “buy and hold” sector.

Since I talked up Franco-Nevada (FNV) as a form of “catastrophe insurance” back in December (and later bought shares of it myself), here’s just a little reminder of what the last almost-ten years (since December, 2007 when Franco-Nevada was spun back out of Newmont) looked like for mining stocks (represented by the GDX ETF in orange, that’s the index of large gold mining companies), gold itself (as represented by the GLD ETF, in blue, which is invested in physical gold in storage), and a couple royalty companies, Sandstorm Gold (SAND, the upstart, in red) and Franco-Nevada (the “blue chip” gold royalty company, in green). Franco-Nevada and Sandstorm are in Canadian dollars, so their outperformance, while very real, is somewhat exaggerated by the decline in the Canadian dollar over the past three or four years.
There’s some cherry-picking in there to emphasize the attractiveness of the royalty model in precious metals… Silver Wheaton (SLW) and Royal Gold (RGLD) have not done as well over the past decade as Sandstorm and Franco-Nevada, partly because RGLD is less diversified and has a couple of big streams and royalty deals that worked out poorly in recent years (and because Silver Wheaton is more silver-focused and has also been facing large tax issues in Canada). But still, I think that’s a pretty nice long-term example of a general notion that I keep coming back to over and over — gold miners stink, on average, but gold gradually increases over (very long) periods of time, partly because currencies decline in value over time… and the only ones who can reliably compound earnings in the mining sector are the royalty companies who take a nibble off the top of mining operations, reinvest that into more royalties, and let it build while other people do the hard and expensive work of exploring for and exploiting gold deposits. The downside, beyond the obvious reliance on commodity prices for cash flow (“falling gold means less money”), is that when gold goes up by 50% the royalty companies don’t do as well as the more speculative miners.

If gold continues to dip, I’ll likely look for opportunities to nibble more on the royalty companies in my portfolio… but I’ll let the little speculative positions (PVG call options, NDM.TO warrants, LGC, etc.) ride the ups and downs.

Probably the biggest negative news-driven move in my portfolio in recent weeks came from Blackbird Energy (BBI.V), which dropped mostly because of a substantial fundraising below market prices (partly to fund drilling, it appears, partly to fund another land acquisition deal they also made recently). This is a jitterbug of an emerging natural gas liquids company in the Montney, with a little added juice because they own 10% of a production technology company (Stage Completions) that’s trying to dramatically improve fracking and completion efficiency (with Blackbird’s wells serving as a test bed to some degree). The shares in this latest financing were sold mostly at 55 cents, raising about C$80 million, and the stock quickly fell 15%+ to roughly 56 cents in reaction.

Volatility like this is not worth sweating over, though my position is in warrants so it’s even more volatile than the shares have been — the company has proven that they’re interested in growing aggressively in both adding new blocks to their drilling inventory and getting drilling and completions done, and that kind of aggressive growth requires financing. If you self-finance through cash flow, you grow much, much more slowly, so firms that try to jump-start and become much larger, particularly in capital-intensive industries like oil and gas production, often raise what seem like massive amounts of equity or debt capital just when investors had been thinking that they’re close to becoming easy and profitable — that’s because managers are not looking for easy and profitable and gradually growing the company, they’re looking at how to scale up fast and turn a $300 million company into a $3 billion company. That’s riskier, of course, but also pretty fun to watch. News this year will be substantial as Blackbird tries to get more wells producing and tied in to pipelines and a processing plant to get production up to a sustainable level, and from what I can tell things still look good so far… but it’s also still very early. I’m still giving this small position plenty of room.

And the mutual fund I wanted to check in with you about is the Doubleline Shiller Enhanced CAPE fund (DSEEX), an open-ended mutual fund that I wrote about last Summer and have been gradually building a position in.

This fund is what’s called a “smart alpha” fund — one that uses some mechanical indexing and rebalancing to try to beat a segment of the market in a programmatic way. They effectively hold much of the portfolio in bonds selected by Jeff Gundlach’s team at Doubleline (Gundlach has inherited the “Bond God” title from Bill Gross), and use that bond portfolio and cash as collateral for swaps and futures exposure to the most undervalued sectors of the market.

The equity exposure is the “Shiller-Enhanced CAPE” strategy — that essentially takes the five cheapest sectors of the market based on the CAPE, which is Shiller’s measure of valuation using the average of ten-years of earnings instead of current earnings, and then throwing out the one of those sectors that has the weakest one-year price momentum as a way to avoid “value trap” sectors, and dividing the equity exposure equally among those remaining four sectors. They rebalance this once a month, so most months they may be switching out of one or two sectors and into one or two different sectors.

What I found compelling, and still do, is that the backtesting to 2002 is impressive… and the real performance since the fund was launched in 2013 is also impressive, with a pretty consistent record of doing slightly better than the overall market.

You can also get exposure to that basic CAPE sector rotation strategy using the CAPE ETN from Barclay’s — that has slightly lower expense than DSEEX (0.42% vs 0.63%) and doesn’t rely on a bond portfolio that could be mismanaged from time to time, though it is an ETN so it is technically a debt instrument and you should be mindful of the creditworthiness of the issuer.

So far, DSEEX has also done better than the CAPE ETN — presumably thanks to a small boost from their bond portfolio. The two track extremely closely to each other, as makes sense, though over the past six months — probably because rising interest rates have created a small drag on the bond portfolio returns — the CAPE ETN has done a hair better than DSEEX (when I say “a hair” I mean it — DSEEX has a six month return 13.89%, CAPE is at 14.04%). Both have consistently squeezed out somewhat better returns than the S&P 500 over their short lives, though that only goes back three years or so (and if you backtest the same strategy it consistently beats the market as well — but only back to 2002 when their backtesting stopped, a period which only includes one market crash and really no long-term periods of rising long-term interest rates).

That’s no guarantee of continued outperformance, of course — but a small improvement in annualized returns adds up nicely over time. DSEEX has a total return of about 65% since its Halloween 2013 launch, versus about 60% for the CAPE ETN and 35% for the S&P 500 — or, if you want to compare to more traditional “value” strategies, about 45% for the Vanguard Value index fund (VVIAX). Still, I find myself fascinated with this simple and effective “smart alpha” strategy, partly because the consistent performance has been reassuring over its first few years and because there’s no reason why the strategy can’t be dramatically scalable from here (unlike with a stock-picking fund, where the manager has more and more trouble beating the market as his fund gets larger and larger). I continue to add to it over time as an alternative to a plain S&P 500 index fund, it’s gradually becoming one of my larger diversified fund positions.

The concern, really, is rising rates and whether that’s going to harm the bond portfolio and turn it into a drag instead of a boost. And it might — but I can’t think of anyone I’d rather have managing a bond portfolio than Jeff Gundlach, and it’s not a high-risk portfolio, the intent is really to rely on the CAPE strategy for most of the returns and to just have the interest from their bond investments effectively cover the cost of the swaps and futures that provide their stock exposure. That was working as interest rates fell, but how about over the final six months of 2016, when interest rates had some moments of very rapid rise?

Well, during the third quarter DSEEX did phenomenally well, with a jolt of outperformance as the fund returned 8% while the S&P returned less than half that. The outperformance was because of the CAPE strategy, but the fixed income portfolio did contribute to profits (that added 1% returns to the fund, while the CAPE sectors added 7%). In the fourth quarter the CAPE index did outperform the S&P, just barely, but because of a small decline in the fixed income portfolio the fund returned 3.5%, less than the S&P’s 3.8%.

So even though the fund has again started out this year strong (up 3% in January versus 1.9% from the S&P 500), there’s some reason to be mindful about what will happen during rising rates — but the jump in the second half of 2016 was pretty remarkable (roughly 1.4% to 2.5% for the 10-year Treasury rate) and that still wasn’t enough to bring DSEEX down to “below the benchmark” performance. That gives me a fair degree of confidence, but it will be worth watching to see if the management of the bond portfolio has a meaningful negative impact during any possible “shock” changes in interest rates as we prepare for what is widely-expected to be a rising interest rate environment (that’s been widely expected before and not come to pass, of course, so remember — we’re trying to avoid predicting the future).

I like the role this fund is playing in my portfolio, partly because I’m already quite overweight in some large growth companies that are at the top of the S&P 500 (Apple, Facebook, Alphabet), some of which are pretty richly valued, and this counteracts that overemphasis on the largest and most popular stocks to some degree. If you’d like to see Doubleline’s summary of the fund, they recently updated their fact sheet here.[7]

My pleasant experience with DSEEX so far led me to dig into the newest offering from Doubleline that seeks to build on that success — Doubleline’s Shiller Enhanced International CAPE fund (DSEUX), which just launched at the end of December and doesn’t really have any performance metrics yet.

The basic info for the fund is similar — it’s slightly more expensive (0.66% expense ratio), and follows the same strategy (find the five cheapest sectors in Europe, invest in the four that have the best price momentum among those sectors), with the intention of using similar derivatives to the US version, and investing the rest in Doubleline’s bond portfolios. The fund will definitely offer some currency risk (and exposure), mostly to the Euro and Pound (it’s really a “European” fund, not an “International” one).

What we don’t have yet, even in backtesting, are any real performance measures that I’ve seen for this strategy as it applies to Europe — though the data must be out there somewhere, and the odds are pretty good that it will be similar to the US experience (adjusted for currencies). This is a strategy and a management style, and it’s a mutual fund so it will always trade at exactly its net asset value, it’s not a “hot” investment that one must get into now or forever hold your peace, so there’s no rush to consider it. I did put a small amount of money into DSEUX personally as I start to follow it more closely, mostly because I think there are a lot of undervalued stocks in Europe and I am in need of more non-dollar and non-US equity exposure in my portfolio, but it’s a small allocation that I’ll probably plan to grow gradually.

So we close out the week with consensus building about a rate hike, which is going to bring lots of “might cause a recession” headlines coming our way over the weekend, and probably a panic or two on the horizon, but still a wave of optimism prevails in both the market and the real economy. I imagine we should all expect plenty of volatility as interest rates and politics keep themselves firmly planted in the headlines, which will hopefully bring some enticing buying opportunities… but there’s rarely any harm in being patient if you’re a long-term investor.

The market is clearly hopeful, fueled, we’re told, by the fact that Trump sounded slightly more optimistic and “presidential” in his address this week and didn’t say anything petty or juvenile on Twitter for several days in a row. My expectations for real economic and market impacts from this political transition are personally quite limited — as I’ve noted in the past, and as is obvious to most who follow politics, real change is usually far slower and messier than campaign soundbites make it seem… and investors tend to have both short memories and low reserves of patience. But, regardless of whether it’s Donald Trump or John MacDonald’s fictional Meyer warning of dystopia and disaster, remember: they’re probably wrong.

And I’m probably wrong, too. But I’ll keep opining and keep investing, and I’ll be back with more blatheration for you before you know it. Thanks for reading!

Disclosure: I have money invested in the DSEEX mutual fund, as well as a smaller allocation to the DSEUX fund, and Berkshire Hathaway is my largest individual stock holding. I also own shares of Apple, Alphabet and Facebook, mentioned briefly above. I won’t trade in any of those investments for at least three days per Stock Gumshoe’s trading rules.

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  2. studies by Dalbar over the past 20+ years:
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  4. in Berkshire Hathaway’s annual report:
  5. the last 20 years or so of his letters:
  6. [Image]:
  7. updated their fact sheet here.:

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