Saturday, February 24, 2018

Pension Guaranteed

The fourth post I made to this blog (which I started in 2009 after getting laid off from IBM) was about the Pension Benefit Guarantee Corporation (PBGC) which is an US government agency which insures private pensions up to certain limits.  These limits were of interest to me as I was planning to start taking an early retirement pension from IBM later that year.  For people who have started collecting a pension before their plan fails the insurance limit is determined by the year in which their plan fails and their age at that time.  This means the limit increases from calendar year to calendar year (due to an annual inflation adjustment which is sometimes 0) and on birthdays (due to a formula which guarantees larger amounts as your age increases from 45 to 75). 

The upshot was that when I started taking my pension later in 2009 as planned less than half of it was guaranteed but as time went by the guaranteed amount increased in a somewhat irregular way until on my birthday in 2017 it exceeded the amount of my pension (which is fixed).  My pension plan was (and remains) in pretty good shape so I wasn't all that worried that it wasn't completely guaranteed.  Still you never know what the future will bring so it is nice that it is now 100% covered.

The PBGC maximum monthly guarantee tables can be found here.  Note there are some additional limitations (none of which apply to me) that can reduce these amounts.

Wednesday, February 21, 2018

XIV Implodes

XIV was the ticker symbol for an exchange traded note (ETN) designed to move inversely to the VIX index (a measure of volatility in the S&P 500 index) on a daily basis.  So if the VIX index were to go up 10% XIV would ideally go down 10%.  Or if the VIX index were to go down 10% XIV would ideally go up 10%.  This is a simplification, an exact description with numerous warning and caveats can be found in the lengthy prospectus.   One of the warnings (see page PS-16) was:

... The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment. 

Nevertheless with historically low volatility holding XIV would have worked well in 2016 and 2017.  At the end of 2015 XIV closed at 25.8, at the end of 2016 XIV closed at 46.75 and at the end 2017 XIV closed at 134.44.  So for 2016 XIV returned 81.2% and for 2017 XIV did even better returning 187.6%.  This didn't go unnoticed and despite the above warning XIV began to attract long term holders.  Some them thought they had found the road to riches and invested most or all of their available funds. 

Then in February 2018 volatility returned to the market.  On Friday February 2 XIV opened at 126.5.  After a bad Friday for the S&P 500 XIV opened Monday February 5 at 109.57.  After a worse Monday for the S&P 500 XIV opened Tuesday February 6 at 10.49 losing all the gains for 2016 and 2017 and more in one day.  These losses caused the ETN sponsor to terminate the fund eliminating even the theoretical possibility of regaining the lost ground over time.

This of course came as an unexpected and costly shock to those investors who had invested heavily in XIV.  It seems to me that they had basically made 2 serious and avoidable mistakes.

First the fact that XIV had done well in 2016 and 2017 was no guarantee that it would continue to do well.  There are thousands of securities trading in the US markets and an infinite number of strategies for buying and selling them.  So at any given time there are bound to be many securities and strategies that have done well recently out of pure luck.  Also the more popular a strategy becomes the harder it is for it to achieve extraordinary returns as its popularity will move prices against it.  If for example someone noticed that stock prices tended to be low at 10 AM and high at 11 AM and lots of people tried to buy at 10 AM and sell at 11 AM this would drive up prices at 10 AM and reduce them at 11 AM until any excess profits were eliminated.  For this reason no widely known strategy should be expected to reliably produce outsize returns.  I should note here that this argument doesn't apply to index funds because they are trying for average returns not outsize returns.

Second if you have a strategy that has positive expected return but will occasionally suffer substantial losses it is unwise to invest all your money in it as it is very difficult to recover from losing most (or worse all) of your money.  If you lose 50% of your money it takes a 100% gain to get back to even but if you lose 90% of your money 3 consecutive 100% gains still won't get you back to even. 

Sunday, February 18, 2018

2017 Portfolio Review

After outperforming the market in 2016 my brokerage account returned to normal in 2017 and underperformed the market.  The market as represented by the Vanguard S&P 500 ETF, VOO, was up 21.60% (19.47% capital gain, 2.13% income).  My brokerage account was up 19.17% (16.60% capital gain, 2.57% income).  So I lagged by about 2.43%.

Since I didn't make any transactions during the year it is relatively easy to determine the source of my underperformance.  At the start of the year my account was 30.44% invested in individual stocks, 46.46% invested in VOO, 14.72% invested in other Vanguard ETFs and 8.38% invested in cash.  My individual stocks actually outperformed returning 26.32% (23.19% capital gains, 3.12% income).   VOO of course matched the market.  However my other ETFs lagged badly returning 6.99% (3.31% capital gains, 3.68% income) as did cash returning about 1.01% all income.  So weighting by position size my individual stocks contributed 1.44% of outperformance, my ETFs contributed 2.15% of underperformance and my cash position contributed 1.72% of underperformance.  Which sums to 2.43% of underperformance.

My individual stock outperformers (beating the market by at least 10%) were CAT, AET, ALL, SOUHY, NSC and BBL.  My market performers (within 10% of the market return) were INTC, JPM, CM, PEG, BNS, ED, WFC and WBK.  My underperformers (lagging the market by at least 10%) were XOM, IBM and TGT.  Among my ETFs VYM and VPU lagged the market but were within 10%.  VNQ and VDE underperformed.   

Monday, January 1, 2018

Quicken Workaround Again

I use the 2010 Quicken Premier program to keep track of my personal finances including some stocks, ETFs and mutual funds that I own.  In 2016 the update function which downloaded current prices from the internet stopped working.  However you can still input prices from a csv (comma separated values) file in the appropriate format and as explained in this post I figured out a way to produce such a file (without entering each price manually) from the Google finance portfolio feature.  Unfortunately in November 2017 Google revamped their finance pages and eliminated the portfolio feature.  It is unclear to me why they did this since this seems like a useful feature that one would not think would be difficult to support.  The new pages (which seem to be designed to be viewed on a phone) seem much less useful.  Anyway I needed a new workaround.

I tried Yahoo again but I still can't create an account.  Apparently this is because Yahoo requires new accounts to be associated with a cell phone (which I don't have).  Annoyingly Yahoo doesn't clearly explain this instead providing a registration procedure for people without cell phones that doesn't work.

Fortunately I was able to use Morningstar.  This requires a basic account which is free but you do have to register.  Morningstar's portfolio feature allows you to enter a list of securities.  It demands purchase dates and share numbers for each but you don't have to enter real values.  Once you have your portfolio set up you can periodically update the security values with current prices.  You can then download them into an Excel spreadsheet.  Then you can use the free Open Office version of Excel to export the spreadsheet as a csv file (ignoring warnings about format incompatibilities).  Finally I wrote another little Fortran program to extract the prices from the csv file and put them in the format Quicken wants.  The main difficulty here was that the security names (like "International Business Machines") were stored instead of the symbols ("IBM") which is what Quicken wants so I also have the program read a list of symbols which I created (this list will have to be updated if I buy or sell securities).  A bit complicated but still better than trying to enter many prices manually.

Wednesday, December 6, 2017


The Deep Mind division of Google just released a paper in which they describe how they applied the methods they used to develop a Go program that achieved super human strength to develop programs to play chess and shogi.  The best previously existing chess and shogi programs are based on alpha/beta search and have been incrementally improved over many years.  They have been stronger than the best human chess players for about 20 years (Deep Blue beat Gary Kasparov in a 6 game match in 1997) and recently surpassed human shogi players as well.  However the Google programs (named AlphaZero in each case) appear to be stronger still, defeating Stockfish, a strong chess program, and Elmo, a strong shogi program by wide margins in 100 game matches.  10 example games (all wins for AlphaZero) in the match against Stockfish were included in an appendix to the paper and can be played over here.  They are pretty convincing (with the caveat that there doesn't seem to be much opening variation).  AlphaZero wins several games with long term positional sacrifices where it is not initially apparent that it has sufficient compensation for the material loss.

This is kind of a big deal.  People had tried applying Monte Carlo search with neural net evaluation functions to chess before but were unable to match the performance of highly tuned alpha/beta search programs developed over many years with lots of domain specific knowledge hardwired in.   Using a general algorithm with domain specific knowledge limited to the rules of the game to quickly develop apparently superior programs is impressive and a bit scary.

Sunday, March 26, 2017


Long ago I was given a Zenith "Circle of Sound" digital AM/FM clock radio and it has served me well over the years.  Recently however it has developed a bizarre fault.  It has a 3-way switch on the back for setting the time or alarm.  Move the switch one way and you can adjust the time, move it the other way and you can adjust the alarm setting, return the switch to the center position to resume normal operation. But now when I move the switch to adjust the time the time displayed is different from the time displayed in normal operation and adjusting it has no effect on the time displayed once the switch is returned to the center position.  I discovered this when trying to advance the time (spring forward) for daylight savings time.  Fortunately I figured out an alternative way to set the correct time.  If you unplug the radio and then plug it in again the time is set to 12 PM (midnight).  (At one time the radio had a battery that allowed it to keep time across short power failures but this gradually ceased to work.)  So I was able to set the time correctly by unplugging the radio, waiting until midnight and then plugging it in again.  A little inconvenient but fortunately the time doesn't have to be set very often.

Tuesday, January 24, 2017

2016 Portfolio Review

After several years of trailing the market, in 2016 my brokerage account outperformed. It had a total return of 13.67% (composed of capital gains of 10.97% and income of 2.70%).  The market (as represented by the S&P 500 ETF index fund VOO) had a total return of 12.04% (capital gains 9.83%, income 2.21%).

My best performer was SOUHY (a spinoff of BBL) which was up 260.71%.  However this is my smallest position.  BBL also did well up 41.55% but remains badly under water.  These are mining stocks and CAT (which makes mining equipment among other things) also rallied strongly up 40.99% as did my railroad, NSC, up 30.55%.  My Canadian banks (BNS up 43.08% and CM up 29.31%) did well as did JPM (up 33.47%).  My other American bank, Wells Fargo (WFC) lagged (up 4.17%).  I purchased WFC in hopes it would be less scandal prone than JPM which hasn't worked out too good. My Australian bank WBK (down -.22%) continued to underperform.

My energy holdings XOM (up 19.62%)  and the sector ETF, VDE (up 28.84%) beat the market but COP (which I sold in October) lagged (off 2.73%).  The sale proved poorly timed as COP rallied at the end of the year ending up 9.53%. This is a pitfall of tax loss selling, you can end up selling temporarily depressed securities before they recover.  I would have been better off reinvesting the sale proceeds in VDE as I considered but didn't do.

My utilities also beat the market with ED (up 18.81%) and PEG (up 17.65%) slightly outperforming my sector ETF, VPU (up 17.56%).  VYM (a high dividend ETF) also outperformed (up 16.82%) as did insurance companies Allstate (ALL up 21.45%) and Aetna (AET up 15.62%).  IBM (up 24.61%) also outperformed.

Lagging were VNQ (a REIT index ETF) up 8.50%, Intel (INTC) up 8.30% and Target (TGT) up 2.67%.

I began the year with 4.54% in cash and ended with 8.38%.  The increase was due to dividends received and the COP sale slightly offset by the increase in value of the portfolio.  The cash position hurt performance as interest rates remained near 0.  The COP sale was my only trade.

Although I beat the market this year I remain well behind over the life of the account.  Beating the market (other than by luck) is hard and probably isn't something the average person should expect to do.