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November 2020 Performance Review

December 4, 2020

So much for the election causing trouble for the market. It was a good month all around for basically everything, with over a 10% rise in the S&P 500—and that was on the low end of global stocks. The news of multiple COVID vaccines saving us from perpetual shutdowns is likely a big part of the excitement. As discussed here recently, the stock market is in some form of a bubble, and perhaps investors just wanted to get this election hysteria out of the way to get back to the business of growth stock, speculating on the (reverse) Robinhood app, which ultimately will facilitate stealing from the poor and giving to the rich. Easy margin gambling from a phone is probably not going to create a world of millennial millionaires any more than day trading in the late 1990s did.

In such a can't-lose market, our Conservative portfolio gained 7.58% and our Aggressive portfolio gained 9.42%. Benchmark Vanguard funds for November 2020 were as follows: Vanguard 500 Index Fund (VFINX), up 10.95%; Vanguard Total Bond Index (VBMFX), up 1.11%; Vanguard Developed Mkts Index (VTMGX), up 14.78%; Vanguard Emerging Mkts Index (VEIEX), up 8.22%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 9.72%.

Considering our Conservative portfolio in real money is currently only around 46% stock funds and our Aggressive portfolio about 68% stocks before deducting inverse ETFs in the Aggressive portfolio that take it down to effectively 62%-ish, this was a pretty good month relatively. The shift away from US big-cap tech to other areas abroad and to smaller-cap value stocks may be here in much the way the 2000 peak was really the end of a tech and growth stock bubble.

One area boosting our returns last month was energy, with Vanguard Energy (VDE) up 28% (yet still down from our purchase) as investors in this sector flip-flop between peak oil fears and a permanent reduction in air travel and the idea that the economy is going to boom from a stimulus and low rates driving up energy consumption. One thing is for sure: if Tesla really does deserve the recent $565 billion market cap, then oil companies, as well as many auto companies, need to start going out of business soon because everybody can't be worth their current valuations together.

Perversely, if Tesla is successful, boring old utilities companies could be the new energy companies. Fortunately, we own Vanguard Utilities (VPU) as well, though it was our least impressive stock fund last month—up an anemic 1.43% (after a decent run). Perhaps that is the seesaw—oil companies vs. electric utilities.

Foreign stocks were where the real action was, even though COVID and its resulting economic problems are fast becoming global again. Foreign stocks in general where up about 14% last month, with our newish holding Franklin FTSE Brazil (FLBR) up 24.06%, followed by Franklin FTSE South Korea (FLKR) up 18.38%. Our Vanguard Small-Cap Value (VBR) holding was up 17.42%, even more than larger-cap value stocks, which lifted Vanguard Value Index (VTV) up 12.76%.

To get an idea of how strong this growth-over-value boom has been recently, the 3-year annualized return on current holding Vanguard Value Index (VTV) is just 6.63% while the growth version Vanguard Growth ETF (VUG), a formerly popular ETF with us, is up 22.08% annualized. We clearly got out of growth (back in 2016-ish) too soon and missed the most exciting part of the bubble—the end. We bought Vanguard Growth ETF (VUG) in 2007 and owned several large-cap growth funds for years, but bailed for value too soon. We used to own the XLK tech ETF if you really want to cry about leaving a party too soon…

Bonds are a dangerous area with little room for capital gains and minimal yield, though significantly higher rates for long periods of time are almost equally unlikely as the world is now priced for low rates. The only real question is just how negative the returns will be adjusting for inflation—do we get 2% inflation on a 1% yield bond or 4% inflation on a 2% bond? Without much yield available, our only risky bond fund iShares JP Morgan Em. Bond (LEMB) had a good month, with a 4.82% gain, though much of this was just our dollar sinking relative to foreign currencies, a situation which appears to be accelerating. Much of the early 2000s' outperformance of foreign funds was based on a falling dollar as well.

It is really hard to just say stocks are overpriced because with negative inflation-adjusted low rates the moon is almost the limit. If you could borrow for 10 years at around 1%-3% (and many can) you can pretty much finance the debt cost with the cash flow from most successful corporations; in other words, if you borrowed a few billion dollars and bought a company, the chances of that not working out is slim. This is sort of like saying home prices are high now, but if you can get a loan at 2.75% and a tenant can cover all the costs of ownership including debt payments, is real estate expensive?

Playing the three bubbles works like this: imagine you had a $1M house with no loan that you plan on living in for 30+ years—you could borrow, say, $700k at maybe 2.75% and just buy a stock index fund and use the (low tax) dividends of 1.65%-ish plus some sales of maybe 3.25% of capital each year (until stock dividends grow to exceed the entire fixed mortgage payment) to finance the entire (often deductible) mortgage payment.

The only way you won't own a large portfolio worth millions in 30 years, paid for by a bank, is if you have to move or sell stocks after a drop or we get deflation in everything but your fixed mortgage payments. No wonder the Fed is printing money like a drunken sailor who somehow got a job printing money without a solid background in monetary policy in practice and theory.

How it all goes down from this very rational stock, bond, and real estate bubble is either rates go higher (not very likely) or simply the fear of losing 25%-75% fast in stocks takes over and everybody wants out (more likely) or the earnings (or rent in the real estate example) start to go down over time or deflate—the real depression scenario we've thus far avoided in 2008 and 2020.

So far the Fed seems ready to create as much money as possible to prevent that from happening. Maybe it will work with stocks and bonds, but how do you create enough money to rationalize paying ever-higher rents in a city with falling wages and occupancy levels without massive inflation? Stocks and bonds are easy to sell fast, so the panic button crash is more likely than in real estate, but real estate earnings are more at risk than stock earnings in this pandemic economic reshuffle.

Perhaps this bubble is really just money going places to not get watered down by the new money being created. Are we that far off from a (perhaps utopian) future where the government just creates money each month and distributes it to everyone to spend from their homes on goods and services from perpetually profitable companies that are so efficient we never get inflation, even with most workers on their sofas? If not now, perhaps with a robot workforce that can always produce more to meet demand. If all we buy is digital content, do old theories about supply and demand and prices even matter?

Stock Funds1mo %
Vanguard Energy (VDE)28.04%
Franklin FTSE Brazil (FLBR)24.06%
Franklin FTSE South Korea (FLKR)18.38%
Vanguard Small-Cap Value (VBR)17.42%
Franklin FTSE Germany (FLGR)16.74%
Vanguard FTSE Europe (VGK)16.39%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)14.78%
Vanguard FTSE Developed Mkts. (VEA)14.30%
Homestead Value Fund (HOVLX)13.10%
Vanguard Value Index (VTV)12.76%
[Benchmark] Vanguard 500 Index (VFINX)10.95%
VanEck Vectors Pharma. (PPH)10.41%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)8.22%
Franklin FTSE China (FLCH)2.89%
Vanguard Utilities (VPU)1.43%
ProShares Short QQQ (PSQ)-10.57%
ProShares Decline of Retail (EMTY)-15.18%
Bond Funds1mo %
iShares JP Morgan Em. Bond (LEMB)4.82%
[Benchmark] Vanguard Total Bond Index (VBMFX)1.11%
Schwab US TIPS (SCHP)1.10%
Vanguard S/T Infl. Protect. (VTIP)0.59%