Beware Of Their Agenda

While scrolling through LinkedIn, I saw a recent quote by billionaire Sam Zell to the effect that working in a traditional office will make a comeback because creativity and motivation are not easily fostered by working remotely through Zoom. Of course Sam Zell would say that, I thought. Sam Zell is the head of Equity Office Properties, one of the largest developers and owners of office towers in the US. It’s not news that Sam Zell said he believes offices will make a comeback; it would have been news had he made the opposite statement.

Sam Zell, CEO of Equity Office Propertis

They All Have An Agenda

Sam Zell’s statement is self-serving. More people in offices means more tenants which means higher office rents which means more money in Sam’s pocket. Yet Sam’s statement is consistent with what you see and hear from the talking heads in financial and social media. All of these people are self-promoters with an agenda, which is to put more money into their own pockets. Not that there is anything wrong with that. Every business person is trying to make more money and their statements and actions reflect that motivation.

Think Critically

You can think of all forms of media and sources of information as a forum for conflicting ideas, and it is up to each person to think critically and decide who to believe and who not to believe. The ability to think critically is the key. Just as Sam Zell promotes a return to traditional offices, I’m sure that a statement from the CEO of Zoom (Eric Yuan) would be to the effect that the era of traditional offices is over and that business henceforth will be conducted primarily remotely using platforms such as Zoom. Which statement do you believe? You have to decide for yourself by looking at the data. Same for any situation where you have competing points of view. All of these people are in the game to make more money for themselves, and so are you. Use your best judgement, make your choice, and hope for the best. That is our gift as human beings.


I am not picking on Sam Zell here. I read his quote and thought there was something universal about it and its context, so I thought I would write about it. My point is to be skeptical about self-promoters; i.e., almost everyone who is quoted in any form of media. Skeptical not in a bad way or that they are bad people, but to understand that they have an agenda to promote which is probably different than your own agenda. Understand this and it will give you perspective on what you need to do to achieve your own goals.

Are Investors Getting Complacent?

As of this morning, the VIX Index, aka the Fear Index, is hovering at around 18, which is the lowest it has been since pre-Covid. The Equity Put/Call Ratio is low, at around 0.74, which is below its 200 Day moving average of about 0.8. The stock market is “melting up”, with the S&P 500 at an all-time record high and the Nasdaq 100 Index up over 1% today and only about 5% off its record high after a sell-off from mid-February into early March. The $1.9 Trillion American Rescue Plan stimulus bill has been signed, and now President Biden has proposed another $2.3 Trillion to be spent on “infrastructure”, although details of the bill suggest otherwise. The rising stock market suggests that investors believe the upsides of all of this government spending will outweigh the downsides and that corporate earnings will rise, and so investors are buying stocks. Do you believe investors are showing their complacency in this view?

Inflation: The Danger

The big risk with all of this government spending is that inflation will rise and that the dollars that people have will be worth less in the future due to this inflation. Higher inflation means higher interest rates, and though the Treasury market has stabilized for the time being, rates will rise if indicators show that the inflation risk is elevated. It was a rise in rates across the yield curve that caused the mini-correction that we had, especially in the Nasdaq 100 Index, during February and early March. Look for another mini-correction in the stock market if rates move up again, even by another 10 basis points. For instance, if the 10 Year US Treasury Yield rises from its current level of about 1.68% to 1.8%, a rate that it hasn’t hit since pre-Covid, look for stocks to sell off again, with high-multiple Nasdaq 100 stocks being the most vulnerable.

Are Investors Really Complacent?

Though the readings on the VIX, Put/Call Ratio, and the record or near-record levels of the big stock indexes might suggest that investors may be complacent and may not be heeding the risks of higher inflation and higher interest rates, I’m not so sure that the readings show complacency. True, the VIX Index is lower than it has been in over a year, but before Covid, the VIX seldom broke above 20 for the prior 4 years. True, the 10 Year Treasury Yield is up, but its yield was north of 2% as recently as July 2019 and for most of the 3 years prior to then as well. Perhaps the low Put/Call ratio and the “melt-up” in stock prices doesn’t reflect complacency as much as it reflects investor optimism that our nation and our economy are finally returning to “normal” after the Covid period.


I believe the key will be the rate at which inflation will rise. Watch things closely here. If most of the supply chain issues can be addressed and the rise in inflation can be kept in check, then current investor optimism will have been justified. However, if the stimulus spending coincides with an economy that struggles to emerge from supply chain bottlenecks and other international issues, then the bet may have been misplaced. My guess is that inflation will rise to perhaps the mid-2%’s, but that will be manageable and we will make it work. “Be skeptical when others are greedy” is a good thought to keep in mind at this point.

Last Chance to Refinance

Not really – you can refinance at any time if you aren’t looking for the lowest possible mortgage rate. However, mortgage rates are up and there is better chance they will continue to rise than fall over the next year, as all longer-term interest rates are projected to rise. So, if you haven’t yet refinanced and taken advantage of low mortgage rates, now is the time to do it.

Mortgage Bankers Association

According to this article from Calculated Risk, the Mortgage Bankers Association (MBA)’s Weekly Survey from last week shows that average 30 Year Fixed rates have risen 50 basis points since the beginning of this year and now average 3.36%. Not bad, but not as appealing as the sub-3% rates we saw during Q4 2020. As a result, the article goes on, their “refinance index” is down 5% from the prior week’s survey, meaning that fewer applications for refinance are being submitted. This doesn’t mean the housing market is weak. On the contrary, it is significantly stronger and is expected to remain so due to, as the article says, inadequate housing inventory.

Human Nature

If you think about it, it makes sense that refinances will decline as mortgage rates go up. As with any purchase decision – and I consider a mortgage refinance to be a purchase decision because the borrower likely doesn’t need to refinance – if the price is going down, the buyer/borrower will wait to see if the price might go down some more before committing to the transaction. This is called bottom-fishing, and it is also indicative of why deflation is such a bad economic thing: people refrain from economic activity if the price is going down. Then, once rates bottom out or even rise a bit, borrowers will put their chips on the table and commit. They will continue to refinance as rates go up slightly – I am speaking in a macro sense here – until it no longer makes economic sense to refinance. This could take a long time if the borrower hasn’t refinanced in a while, or it could be a short time for serial refinancers.

Pros and Cons of Refinancing

The obvious pro of refinancing is that you have a lower interest rate and a lower monthly payment, especially if you don’t take any “cash out” in the process of your refinance. Another pro is that you might be able to pull some cash out if your home has appreciated significantly since your prior loan and you need a lump sum of money for some reason. Some families finance their children’s college educations through cash-out refinances, which is a very good way to do it because it is better to pay for college by borrowing in the low-3%’s and paying it back over 30 years than it is to borrow at the higher rates of some student loan programs.

The cons of refinancing include the following:

  • You may have to pay points and/or fees for your refinance loan, which means comparing your current mortgage rate to the new proposed mortgage rate is not an apples-to-apples comparison. You have to factor in the cost of these fees and points, which the lender should provide to you when it quotes you the Annual Percentage Rate (APR) of the new loan.
  • One of the reasons your monthly payment goes down is because, with the new mortgage, you now have a new 30 year timetable for paying off your loan. Let’s say you were 10 years into your prior loan: that means you would have your house paid off in 20 years at the current payment. Now, although you are paying less per month with the new loan, you won’t pay off your house for another 30 years. Of course, you can always make extra principal payments that will speed up the payoff process – typically with no penalty payable to the lender. Or you can refinance into a 15 year fixed rate loan, and get the lower rate (and potentially lower payment) and still own your home free and clear in 15 years.
  • If you take cash out as part of a refinance, now you owe more. No problem, you may say, as long as your loan is 80% loan-to-value or lower, meaning that you have at least a 20% equity cushion if you have to sell your house. And, you may be right if you feel like you are in a growing area with a strong housing market. However, don’t take the decision lightly if you are considering a cash-out refinance. It could get you into a financial bind down the road.


I believe you should act now if you are considering a mortgage refinance if you want a good rate. I believe mortgage rates will rise over the next year, so don’t wait. With the for-sale housing market as strong as it is, there is a better possibility that your house will appraise out at a value that will justify the loan amount that you want, especially if you are looking to take cash out of the transaction.

A Company Is Worth Its Future Earnings

That Gamestop (GME) is in the middle of another Reddit-fueled run is baffling to me. It makes me think that people who are “long” GME believe that GME is worth what someone else will pay for it, and not what the the company will earn in the future. The “Greater Fool” theory, meaning that I will make money as long as some other greater fool pays me more to buy it from me than I paid to buy it, is aptly named. Once all of the greater fools either get skunked or go away to their next victim, those investors who remain will revert to valuing a company based on its projected future earnings. I guess there will will always be greater fools out there who don’t understand this basic Investing 101 concept.


As many of you are aware, in January 2021 GME went from a boring low-$20’s stock to a $400+ stock over the course of a couple of weeks because of a social media-inspired short squeeze. Well, the short squeeze play died out a bit but not completely, and GME went from about $50 back up to over $250 just this month, and it trades today at about $188. Again, this March run was fueled by a Reddit forum. Do GME’s fundamentals and future earnings justify a $400, or a $250, or a $188 price? They do not. GME announces its earnings later today, and although GME is expected to show a profit for Q4 2020, it lost almost $300 Million for the first 3 quarters of 2020. Though Covid didn’t help, it also wasn’t the cause of GME’s losses, as GME lost nearly $500 Million for the first 3 quarters of 2020. A start-up new high-tech IPO company can have its stock go up while losing hundreds of millions of dollars, but not an established retailer like Gamestop. The point is, based on future earnings, GME’s stock price of $188, or $250, or $400 cannot be justified.


I wrote about the discounted cash flow model of business valuation a couple of weeks ago. My point then was that corporate valuations are up because the discount rate, specifically the portion of the discount rate that is termed the “risk-free” rate, is low – in the 1% range or a bit higher. The discounted cash flow, or dcf, model is how legendary investor Warren Buffett values his investments. Buffett views any potential investment purely as a stream of future cash flows. If he understands the nuances of the business and knows and trusts that the managers of that business can do a good job and deliver, then Buffett believes the risks that he will eventually see the projected future cash flows are minimized. When Buffett discounts those future cash flows to the present, if that net present value is more than the price at which the company is trading today, Buffett will look to buy the company’s stock. Fortunately for him, he has enough money that he can buy the entire company, and not just a 100 share piece of it.


Don’t let Buffett’s store of dry powder for investing cloud your own thinking as to how you should look at an investment. Look to future cash flows. Don’t use the Greater Fool theory and believe someone out there will eventually pay you more than you paid. Use the DCF method for valuing the future prospects of your potential invesstments. And don’t play the GME game.

It Worked For A While, Then It Didn’t

Our doorbell at our home is broken and I am in the process of putting a new doorbell system in place. Easy, you may say, in this age of Bluetooth electronic doorbells with cameras. Well, it turns out it isn’t that easy. I did install a new camera doorbell – a major name brand in the market. It worked for a while, but then it didn’t. The reason it quit working had to do with software: I also subsequently installed a new WiFi router. The doorbell needs to interface with the WiFi in order to connect with the doorbell chime and to send you the pictures of your front door that you can see on the app related to the doorbell. The problem was that the new router’s software and the doorbell’s software wouldn’t speak to one another. Perhaps I should have known this before I spent mega $$ on my router, but who knew? So now I am in the middle of installing a whole new doorbell system, and I am hitting more roadblocks along the way. Funny how what you think should be an easy project turns out to be all-consuming.

Need To Adapt

The point that I am making is that one needs to be able to adapt even if one finds what one thinks is the solution to their problems. This is because stuff happens that could render their solution obsolete. Don’t get too comfortable because the world may change and your solution doesn’t work any more.

Your Personal Finances

There are many ways this lesson applies to your personal finances. In fact, the process of changes and the need to adapt to changes plays out in real time every business day that the markets are open for business. Think about what your plans were a year ago (ok, 13 months ago), before Covid. How have you had to adapt your financial plans and goals since Covid? If you are lucky, you haven’t had to change and adapt very much at all. If that is the case, then your plan back then was solid, and you should keep plugging at it even now as we (hopefully) reach the back end of this awful period. If you have been personally set back by Covid, either through business or job loss or worse, it doesn’t mean your plans were no good. It means that stuff happens and you need to adapt. Maybe you have “retired” a little earlier in your life than you thought you would. If so, you have probably had to adapt and change your personal financial plan and goals a little more than you had hoped to do. Hopefully you have been able to do so without missing many beats.

Your Portfolio

Another issue may be with the composition of your investment portfolio. As markets change, what may have worked before may no longer work for you now. Interest rates change. Industries and sectors move in and out of favor. New technologies may disrupt companies that you may have a stake in. It can be disconcerting to you if you set up what you think is a strong portfolio only to have its foundation shaken by these market changes and disruptions.

The Ask

One thought I have for you is that you don’t have to face the stormy seas of all of these changes by yourself. I ask that you consider getting help from a Certified Financial Planner® such as yours truly. Though you may feel like you have a handle on your own finances, often, two heads are better than one. Having a trusted financial professional with whom you can discuss and debate plans and ideas may be the perfect ballast that you need to steer your ship. Back to my issue with my doorbell: I didn’t have the right person to help me find the right solution to my broken doorbell. I had good people who knew about doorbells, and other good people who knew about home WiFi systems, but not people who knew enough about both and how they interface with one another. The piecemeal approach didn’t work for me and it cost me. Don’t make the same mistake with your personal finances. If you work with a professional, as you should, make sure the professional has and understands the entire picture, not just a part of it. Only then can they come up with a solution that addresses the entirety of your situation.

Corporate Earnings Discount Rate

The value of a corporation is best determined by estimating future earnings and then discounting those earnings back to the present at some discount rate. The discount rate for that corporation includes the “risk-free” rate, which is typically the US Treasury rate, plus some risk premium that an investor is willing to take on for investing in that corporation in that industry. For instance, a discount rate could be the 10 Year US Treasury plus 800 basis points. This is how Finance 101 students learn to value a company.

Today’s Problem

The problem we are having in today’s market is that the “risk-free” rate is so low. For the past year, since Covid hit and the Federal Reserve dropped interest rates, Treasury rates across the yield curve have been at or below 1%. Only recently have long-term rates (10 years and longer) risen above 1%, and the 10-Year is at about 1.5% right now. With one element of the corporate earnings discount rate so low, either the risk premium will increase and corporate valuations will remain the same, or risk premiums will remain the same and corporate valuations will increase. A lower discount rate means a higher valuation for those future earnings.

The Past Year

We hit the bottom with the Covid shutdown and stock market correction during the 3rd week of March 2020, which is almost 1 year ago. Since then, it has been almost straight up, with the exception of the past couple of weeks. As of today, the Nasdaq 100 Index is up about 88% since the March 2020 low. That tells me that the risk premium that investors place on the earnings of the Nasdaq 100 corporations has not risen; if anything, it has declined. Consequently, the discount rates for their corporate earnings have declined and corporate valuations have risen – by 88% in this case.

Will This Trend Continue?

I mentioned that the past couple of weeks have not been straight up for the stock market, especially the Nasdaq 100 Index. What has crept back in is a fear of inflation. Investors now realize that all of the actions by the Federal Reserve to buy bonds and to loosen the money supply, as well as the fiscal stimulus bills, including the American Rescue Plan Act of 2021 just passed by Congress, could cause higher inflation. Why? Because together they represent significantly more money in the hands of consumers during a period where there are shortages caused by the Covid economic shutdown. More money chasing fewer goods causes higher inflation, and higher inflation causes higher interest rates. The “risk-free” 10-Year US Treasury rate has risen from below 1% couple of months ago to about 1.5% now. This rise in Treasury rates, caused by fears of increased inflation, is causing jitters for investors, particularly for those heavy in the high-flying Nasdaq 100 index companies. If you assume that earnings in these companies will remain strong but now you have to discount them at 50-60 basis points higher than you did 1-2 months ago, that causes a significant change in what you think those companies are worth today. This change in the corporate earnings discount rate, more than changes in the outlook for corporate earnings, explains why we had a 10% +/- correction in the Nasdaq 100 index from mid-February to earlier this week. The Nasdaq 100 has reversed itself during the past couple of days, but further increases in US Treasury rates could send it down once again.


I hope this explanation shows you that it is not always changes in the forecasted fortunes of companies that causes stock sell-offs. Instead, it can be changes in the assumptions of how investors mathematically derive their valuations, such as in changes in US Treasury Rates and/or changes in risk premiums. So, don’t blame corporate management at first; blame those old bugaboos, inflation and higher interest rates.

Life Is A Journey

I am currently listening to an Audiobook version of Ken Langone’s autobiography, titled “I Love Capitalism!”. Ken Langone was a Wall Street banker who arranged the financing for Home Depot and became very wealthy as a result. He became a philanthropist, and the School of Medicine at New York University is named after him. Despite his riches, Langone is a noted cheapskate, and he would be proud of me because I am borrowing his Audiobook for free from the library.

Ken Langone

Assortment of Jobs

Langone came from a working-class family and his drive to work hard to make money and achieve his goals was evident early on. The jobs that he had while he was still going to school and college included the following:

  • Paperboy
  • Grocery Store Shelf Stacker
  • Snow shoveler
  • Road construction laborer
  • Cigarette salesman
  • Stationery vendor

The key word is work. Langone had to work to make money and he didn’t care much about what other people thought about the jobs he had, as long as he got paid. As a kid, Langone didn’t really have an idea of what he wanted to have as a career, so rather than sit around and think about it, he just worked his jobs and figured something good would come of it. That’s a great attitude to have.

Life Is A Journey

The point I am making by using Ken Langone’s life experience is that life is a journey. While it is important to have a goal, it is also important to work and to learn and enjoy all of the experiences that you have with each job you have and with each day. The more you show up every day, the more you learn and the better you can figure out how and where you fit in.

Achieving Your Goals

The other point is that you don’t reach your goal on Day 1. Instead, it takes a lifetime of experiences to reach your goals. With respect to planning your finances and achieving financial independence or whatever else your goal may be, it will only happen over a long course of time. As a result, you need patience. Other people’s life experiences may get in the way of your own, as manifested in the ups and downs of the value of your investment portfolio. Make sure you keep this in perspective. It’s great if you hook up with a hot company and make megabucks and realize your dreams upon its IPO, but that’s not the norm. In fact, even that IPO story involves a crap-ton of work by the people who built the company. Ken Langone became an “overnight success” with Home Depot only after years of working his butt off in different capacities on Wall Street. If you are getting impatient, please don’t be, and instead enjoy the experiences of the journey that you are in the middle of.


In addition to the concepts of working hard and being patient that Ken Langone expresses in his autobiography, another concept is also music to my ears. Just the title, “I Love Capitalism!”, with an exclamation point, is a sentiment that is in short supply these days, and is certainly not “woke”. It is great that so many people, particularly young people with no life experience with socialism, feel bad that not everyone shares in our abundance in equal measure. The empathy therein expressed to the lessers is laudable. However, big state-controlled socialist government models are not the answer. Capitalism is not perfect but it does a lot better job distributing wealth to those that want it and need it than does socialism. Socialism has never worked and never will. We need more Ken Langone’s who are willing to go against the current sentiment and express admiration for capitalism, warts and all.

10 Year Treasury vs. Nasdaq

Last week we saw the Nasdaq 100 Index sell off as interest rates, specifically the yield on the 10 Year US Treasury, rose. For instance, on Thursday 2/25, the Nasdaq 100 fell by about 3.5% while the 10 Year yield rose about 20 basis points to about 1.55%. Did these two phenomena occur by happenstance or are they linked? It’s investing, so of course they are linked, but how are they linked? Perhaps not how you might think


Cost of Borrowing?

You might think that stocks go down when rates go up because higher rates increase the cost of borrowing for companies. That is true, but if you think about it, higher rates don’t affect tech companies as much as they do older industries, and the Nasdaq 100 is full of high tech companies. The Apples, Microsofts, and Googles of the world have so much cash and working capital already on their balance sheets that they don’t really have the need to borrow money in a substantial amount. So, if the yield on the 10 Year Treasury goes up 20 basis points, Apple, Microsoft and Google aren’t affected operationally, and their profits won’t take much of a hit. Companies in “old economy” industries such as energy and utilities, by contrast, do finance using debt and so will take an earnings hit if rates go up. Yet it was the Nasdaq 100 Index that took the biggest hit when rates went up last week. Why is that?

Appeal of Alternatives to Stock

The answer is that higher rates make investing in bonds and debt that much more appealing. With the tech stocks that comprise the Nasdaq 100 Index at all-time highs prior to last week’s sell-off and with their future earnings discounted back to the present at lower and lower discount rates that mirror rates along the US Treasury yield curve, any increase in interest rates is bound to have a profound effect on the discount rates that the number crunchers use to value these high-tech companies. If rates go up, then prices go down. Look at it another way: When Treasury rates were below 1% all across the yield curve, as they were for most of the last 3 quarters of 2020, then an investment in Treasuries doesn’t look that appealing. However, if now and investor can earn 1.5% in “risk-free” Treasuries, then that becomes more appealing – not great yet, but better. If so, an investor might be tempted to allocate slightly more money into Treasuries and away from stocks because stocks are already so pricey. With comparatively more money flowing to Treasuries and less to stocks, particularly Nasdaq 100 stocks, then you can see why the Nasdaq 100 stock were the main victims of last week’s increase in interest rates and not other sectors that use more debt to finance their operations.


I am writing this on Monday 3/1 (Happy March!) and the trade-off between Treasuries and the Nasdaq 100 remains, but in the other direction. Yields on 10 Year Treasuries are down about 10 or more basis points from Friday’s close, and the Nasdaq 100 Index is now up over 2.5%. Clearly institutional investors are watching Treasury yields closely as changes in rates seem to be driving both the stock and the bond markets.


In a way it’s good news that fundamental issues such as changes in interest rates are what’s important to the stock market, rather than external issues such as geopolitical maneuverings or terrorism. If so, then although most economists predict that economic activity will improve in 2021 over 2020 as businesses emerge from the Covid shutdown, the stock market may not rise in accordance with the economic improvement. Why? Because interest rates will rise as the economy improves. If rising rates mean that some investors may choose bonds over stocks, then the stock market may have a rough go of it as rates continue to rise. How quickly rates rise and to what extent may be the roadmap for stocks as well, because a more gradual rise in rates will be preferable to a short, sharp shock.

The Meaning of Space

Sometimes when and if you watch financial media shows on CNBC or other such networks, the hosts and/or the guests will be rambling on about something and you realize you don’t understand what they are talking about. This may be because these people have their own vocabulary, and though the words may sound familiar, their meanings may be different the way they use them as opposed to the way you use them. For instance, the word “Space” has many different meanings, and its meaning in a specific context depends on how it is being used. Other words such as “Sector” and “Industry” have similar issues. Read on and I will try to help.


You may hear someone say something like, “Amazon is the leading player in the E-Commerce space.” Or, “Wells Fargo is the leading bank in the home mortgage space.” In this context, think of “space” as kind of like a store, or an area where this particular company does business. If WalMart has store space, then Amazon has e-commerce space. Although it isn’t physical space like WalMart, it does sort of mean the same thing. If you Google “Space”, this definition in the context of investing doesn’t pop up, but the concept of retail store space does, and this definition fits closest to the way the Wall Street jargoneers use it, and so that’s how best to understand “Space” when you hear it used on CNBC.


Ok, you say, but why don’t these talking heads use the term “Sector” instead of “Space”? Doesn’t it mean about the same thing? Yes, Sector and Space both have broad meanings in the investment world. I believe Space is used because Space involves the sense that people and/or businesses are transacting within a certain space, as opposed to Sector, which does not invoke the transactions part of business as much. Or, it could be that some people on CNBC started using the term “Space” and it sounded cool so everyone else started to use “Space” instead of “Sector”. That’s often how jargon or colloquialisms get started, and that’s likely what has transpired here. That said, you should be fluent in the language if you want to visit, and so you should at least know what Space means.


To make matters more complicated, you also hear about “the oil industry” or “the semiconductor industry”. How is an industry different from a sector or a space? There was an explanation for this when I looked it up. It seems that “industry” implies a more narrow definition of a group of companies that produce and sell the same stuff, whereas “sector” is a broader definition. You can have several industries within a sector but not vice versa. For instance, the semiconductor industry and the software industry are part of the high-tech sector. Got it? Clear as mud. And how does “space” differ from “sector” or “industry”? Seems like “space” is closer to “industry”, but that’s just a guess on my part.


They say the best way to learn a language is to immerse yourself within a group of the language’s native speakers. That’s probably true with Wall Street-ese as well. If you decide to work on Wall Street or in the investment world, you will probably become fluent soon enough. However, if you invest and you want to grow your investment knowledge but don’t want to work full-time in the industry, you still need at least to know some of the language. That’s why it’s useful to understand what “experts” you see on TV mean when they use terms such as Space, Sector, or Industry. Although I don’t offer a language lab for Wall Street-ese, I will be happy to clarify any confusion you might have with the language if you shoot me an email.

Safety Versus Return

With US Treasury interest rates as low as they are (although their rates have been slowly rising) and with rates on corporate and other non-government debt also very low, investors seeking a current return face a difficult choice. Either they invest in safe places – government debt, money market funds, or bank CD’s, for example – and earn a miniscule return, or take on substantially more risk in order to earn a current return. This choice has been made worse by the underperformance of the stocks of traditional dividend-paying sectors such as oil, telephone companies, and utilities. Investors looking for dividend-paying stocks have had to deal with a lot of risk and uncertainty.

The Future

What does the future hold for this Safety vs. Return trade-off? On the Return side of things, it is unlikely that the return an investor will earn with safe investments will improve significantly. The US Federal Reserve has stated it is unlikely to raise short-term interest rates for the next few years. The Yield Curve has steepened and I look for it to steepen more – meaning rates on 10 Year-or-more bonds will increase in my opinion. This could help somewhat, especially if one invests in mortgage-backed bonds or bond funds, because mortgage rates correlate to a spread over 10 Year Treasuries. However, an investor will need a whole pile of money if they want to live off of the interest from government- or even corporate-backed bonds.

Diversify Instead

Instead, investors looking for current return will need to get comfortable with the risk associated with dividend stocks, high-yield debt, and any other investment vehicles that pay them a higher current return. The best way to get more comfortable is to diversify their portfolio. Do you like the dividends that you can earn by investing in the major oil companies, but you don’t want to be subject to the ups and downs of the price of oil? Then don’t invest just in oil company stocks, as I know some investors do. AT&T has long been a haven for “widows” looking for dividend income, and it still does pay a hefty current dividend of in excess of 7%. However, AT&T has real problems and is looking to sell its DirecTV assets for about half as much as they paid for them 6 short years ago. If a substantial amount of your net worth is tied up in AT&T stock because you like the dividend, you need to think seriously about selling a chunk of it to protect your net worth, even if it means giving up the generous dividend. Live to fight another day. AT&T is an example of individual company risk that you can mitigate by diversifying your holdings. If you diversify your dividend-paying holdings among several or preferably many different companies, sectors, and industries, you can mitigate the risk that any one company or sector will tank your portfolio while at the same time maintaining a decent current return on your investments.

High Yielding Funds

One thing you might do is screen for dividends. By this I mean you would go to or another free stock quote service that has a screener function and screen for stocks that have a dividend of in excess of 4%, for example. What may turn up through your screen are Exchange-Traded Funds or Closed-End Funds that have high yields. If so, watch out! Not to say that you shouldn’t invest in these funds, but you need to understand what they do. Typically these funds invest in a lot of different equities or bonds, so that is good for diversification. However, a number of these funds use leverage in order to prop up their yield. For instance, for every dollar of investor money the fund has, the fund manager may also borrow a dollar and invest the borrowed dollar along with the investor’s dollar. If whatever the fund invests in pays an 8% dividend and the borrowed money costs only 3%, then the 5% difference gets passed on to the actual investors in the form of an enhanced dividend. This is great as long as debt an equity markets remain stable. However, volatility, especially in the debt and interest rate markets, is the enemy of these types of investments. As long as you understand what you are investing in and the risks associated thereof, then give it a go.

Another Alternative: Covered Calls

Finally, I will once again pitch an alternative for current yield that I have written about before. I write covered calls against long index futures positions. Calls against long index ETFs can accomplish about the same objective. I write calls at strike prices that are somewhat higher than the current trading price of the index, and I do so on a weekly basis. My objective is to provide a current return of at least 6% and preferably higher while still participating in some of the upside of the index. The bad news is that I also participate in 100% of the downside, but I do keep the premium of the call option that I sold. This strategy is diversified in that I am long in index futures, such as the S&P 500 or the Nasdaq 100 Index, so I own a whole portfolio of companies through one index position. By selling the call against the long position, I collect the premium price of the call while still owning the long position. If the price of the index exceeds the strike price of the call option when the option expires, my long position gets called away from me at the strike price, even if the price of the index exceeds the strike price. I hold on to the long position if the price of the long position is below the strike price of the call option at the expiration of the call option. It sounds complicated but it really isn’t once you do it a few times. Options sound risky but they’re not if you transact them as I have laid out here. To me, this is a great way to have a win-win on the initial problem I posed regarding the trade-off between safety and return.


It is a difficult choice between safety and return, but you can mitigate your risks by diversifying, by really understanding what you are getting yourself into, and perhaps by thinking outside of the box a bit with the covered call strategy I outlined. Want to learn more? Please contact me to ask.