One of my investment philosophies I call “sitting by the window with my checkbook.”
Imagine there’s a downtown building, not too tall for openable windows. It houses mostly investment people. They are rich, but are too small to do it like the big boys, and have the public cover their biggest losing bets. If they take a bath, they’re wiped out.
They’re taking baths today, and they’re jumping from the 8th floor window. They cannot face their families with the news that they are falling out of the upper middle class. They will have to sell the cabin. The children will have to go to public school. The eldest will have to start doing yard chores, because the gardener is too costly. They have become what Trump calls ‘losers.’
They mistook their wealth for their sense of self. It’s impaired, and they are fundamental cowards who panic rather than hunker down and toughen up. I like that. I plan to profit from their pain. I’m not making any money today off anyone who isn’t a coward.
I’ve watched a few cowards jump already this morning. I judge the markets by the number of jumpers. When that number rises, I get my checkbook, grab a seat by the window (but not in their way; they will run you over), and wait.
They’re all still done for. They are all having trouble selling their shares. In fact, the shares have not declined in value that much, and will recover in time, but all these men (no women are this stupid) think purely short-term. They have become losers in life, according to their own hypercapitalist, left-hand path world view and assessment of human value. They would have to get real jobs.
I wait for them by the window. I keep the window down when no one’s jumping, to slow them down long enough to talk. As each one comes to the sill, we have a conversation. It may go like this:
Me: “Hey. Before you jump, think about this. Those shares you paid $11/share for? I’ll give you $6/share for them.”
The jumper looks at me in angry moral outrage. “You’ve got to be fucking kidding me! Why would I do that?”
“Well, you’re about to jump. If you find someone to buy them, there’ll be something to pass along to your family. If not, there won’t. Your call?”
“What kind of human being are you, to stop people on their way to this window and offer them bargain basement prices without trying to talk them out of jumping?”
“A smarter kind than you, apparently. You’re jumping and I’m buying. But if you don’t want to, feel free to jump. Another jumper will be along.”
“That is beyond evil. You don’t care about me.”
“Of course I don’t. That’s how this works. It’s how it worked for you until today. It’s not as evil as playing casino under rules that say you can’t lose. At least if I lose, I truly lose, and truly have to pay up. Or jump, if I’m afraid to face my consequences. If I were the jumper, you’d be happy to get a good deal from me before I jumped. Look in my eyes and you look into a mirror.”
“God! Okay, I’ll sell, you horrible bastard.”
Pleasant smile. “Price went down to $5.50.”
“You are insane!”
“$5.40. Deal or no deal?”
“Fine! Give me my $5.40! At least by jumping now, I never have to see your face again!” *leaps, screams, goes splat*
“True. Don’t care. Ah, another jumper. Hey, hold on just a sec, man. I don’t mind if you jump, but before you do, I’ll give you $5.25 for those shares…”
Evil? Yes, in the purely capitalistic, satanic sense of self-interested evil. Capitalism is the purest form of satanism, of left-hand path worship. In LHP worship, one takes what one can according to a few morals and one’s own self-interest and ability. There are reasons why the Judeo-Christian scriptures equate money with a big-ass demon, and say that one cannot worship their god and the demon at the same time.
It’s very amusing to me watching rich televangelists ask poor people for their money–and get it, up to nine figures of it. The televangelists are Anton Szandor LaVey’s wet dream of Satanic principles in action. If people are stupid enough to give them the money, take it, and live high on the hog! the old carny and bunco artist would say.
I’m not LHP, but I play one for the markets.
If I were truly that evil, I wouldn’t come out here and tell you how I do it.
If you think this requires six figures of disposable wealth, think again. Entry point is about $5000 of investable capital.
There’s a junk bond selloff. Junk bonds are bonds that pay high yields because they have low ratings, i.e., the chance they might fail is greater than infinitesimal.
When any selloff happens, it means people are very fearful. Buffett tells us to be greedy when people are fearful. Therefore, this morning, I am greedy.
What that means is that I’m shopping for closed-end junk bond fund shares. I find that this topic is eye-glazing for many people, so I am going with very short paras that won’t lose folks.
First, Sunday is a good day to do this, because the market is closed. Prices aren’t moving. If I make any decisions, I have all day to think about them, chicken out, whatever.
Mutual funds are pooled investments; in essence, you send them your money and they invest it for you.
Closed-end mutual funds are also pooled investments, except that they already got all the money, so when you buy the shares, you buy them from someone who wants to sell, at the market price.
All mutual funds have both a market price and a net asset value (NAV). NAV is what the fund’s actual investments (the bonds themselves) divide out to be worth, per share of the fund in existence. Market price is what you can actually buy or sell those same shares for.
With old school open-end funds, you have to pay NAV. With CEFs, they may trade (could also say: “market price may vary”) at a discount or premium to NAV.
I like discounts, the bigger the better. I especially like them when they come from people’s panic and irrational behavior, because I believe courage should always defeat terror. I am not only willing to make money from freakouts, I find it sardonically satisfying.
Since mutual funds must adjust their investment values to agree with the markets, and since the markets are affected by fear and panic (or euphoria, in its time), we can agree that the NAV incorporates fear into its price, right?
If we agree that fear is priced into the NAV, it follows that a discount to NAV means that said fear is priced into the fund’s shares a second time. It has to be.
Example: If the JKK closed-end fund holds securities that the market has pummeled down to a total NAV of $20/share, but you can buy JKK on the markets for $15/share, obviously the market is adding a second dose of fear. That dose is irrational. The markets already beat it up once.
It’s too bad there isn’t a CEF that invests purely in CEFs of junk bonds. We could get yet another level of fear pricing.
When you look at a yield, the % is meaningless without understanding how your payout money would be calculated if you bought it.
One buys CEFs mostly for yield, not growth. If they appreciate, that’s a bonus, and the best way to have a shot at that is to buy during fear.
That goal harmonizes with the goal of maximum yield, so it’s even greater reason to go full avarice at those times.
That has me updating my CEF shopping list. I might sell some and buy others.
I keep a list of CEFs. Now and then, I look them all up and note the NAV, the market price, the payout, how many of those payouts per year. All that is easy to discover.
From that, the list will calculate the annual yield at market price (this matters), yield at NAV (this is fantasy, since I can’t really buy it, but it helps me compare and gloat), and current premium or discount of market price relative to NAV (of reality to fantasy).
If I see a good chance for a great yield emerge from that list, I consider buying. If I still feel like buying on Monday, I make a note to place an order.
Of course, by then, the market rate will have fluctuated. Naturally, I am not satisfied with a ridiculous bargain. I hold all the leverage here and I’m going to insist on an even bigger discount. If no one will sell it to me for that, fine, no deal. No hard feelings.
Therefore, if I do buy on Monday, I’ll place an order at a price lower than the day’s lowest market price. It will be good until canceled (I’ll have it expire about a month out). Maybe it will reach that price and fill, today or in days to come. Maybe not.
The best deals are when people are jumping.
At first, they all lose more money. That’s fine. A few of the underlying junk bonds may even go bust. All of them won’t. And all the while, every month (in the case of most CEFs), they will send me my yield payout. For years.
Today, I’m checking to see if any of those payouts have dropped, and how they relate to the prices I might have to pay as I sit beside my window with my checkbook.
Days like this come less than once a year, so I’m taking a comfortable seat.