Tag Archives: roger-nusbaum

Avoiding Unnecessary Risks In Firefighting And Investing

By Roger Nusbaum, AdvisorShares ETF Strategist Over the President’s Day weekend, I saw a big chunk of the movie Backdraft. This is the 1991 firefighting movie with Kurt Russell, Billy Baldwin and Robert De Niro. I was not involved with firefighting back then, so I don’t know how unrealistic the fire ground scenes were, but I can tell you that firefighting has changed dramatically versus how it was portrayed in the movie. There were a couple of different scenes where the crew went into burning buildings where there were no people believed to be, including some sort of chemical facility. There is a phrase in firefighting; risk a lot to save a lot, risk a little to save a little, risk nothing to save nothing. There is no empty building that is worth more than a firefighter’s life, going into a burning chemical factory (with no breathing apparatus mind you) is a totally unnecessary risk. The idea of suitable risk is obviously an important part of investing. About eight months ago I was on CNBC with the bear case for a newly IPO’d stock that I would describe as being a trendy gadget. The gadget itself is pretty neat and I have no doubt about the gadget’s ability to do what it is supposed to; my wife wants to get one. My main thesis was that from the top down the risk associated with buying a very expensive stock that produces a faddish item that had already enjoyed tremendous growth in sales before the IPO was simply unnecessary given how late we were in the market cycle. There was no attempt to predict what the market would do but six years into a bull market is late based on past market cycles. After five or six years or longer of rising markets it makes sense to avoid added risk or volatility in the portfolio. While there can be no absolutes it is a good bet that Giant Soda with 40 straight years of dividend increases is less volatile and less risky than Social Media Gadget Dot Com with a PE of 100 (neither Giant Soda or Social Media Gadget Dot Com are real companies). If there is a time to take on added volatility and risk, and for some investors this is totally unnecessary at any time, it would not be after years of a rallying market but when participants are most fearful after a large decline with media questioning why even own stocks. While most people know that buying low is the right thing to do, actually doing it is very difficult. An investment plan is unlikely to be derailed by being unable to pull the trigger in this manner but can be derailed by succumbing to greed at the market’s high and buying too much stock in a company that makes a trendy gadget. The one from my CNBC visit is down 46% from its first day of trading and down 68% from its peak. Even if it had gone up it would have been an unnecessary risk for most investors. The bigger point here is about probabilities. These things are obvious and plainly stated but are often lost in a forest for the trees type of perspective on markets and investing. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com .

Nothing New About Gold

By Roger Nusbaum, AdvisorShares ETF Strategist A big part of successfully engaging in markets (success defined as not doing yourself in with poor decision making and having enough money when you need it) is revisiting certain principles that although crucial can be forgotten when they are most important. A great example of this is holding onto a small allocation to gold for its low to negative correlation to equities. I’ve written about this regularly for more than ten years with the main points being that gold continues to not look like the stock market. That was true ten years ago when equities were flattish and gold went up, it was true during the worst of the financial crisis when stocks went down a lot and gold was kind of flattish, it was true in the most recent bull market when equities rocketed and gold sunk. It is playing out as true now as equities have rolled over for the last six months while gold and mining stocks too for that matter have gone up. Play around with some ticker symbols on Google Finance and you’ll see that the S&P 500 is down high single digits for the last six months while ETFs tracking gold are up about 10% and ETFs tracking miners are up in the neighborhood of 30%. While I don’t think too many investors will want to take on the volatility that goes with the miners, the point is still the same. I continue to believe that if gold is the top performing holding you have then chances are things are going so well in the world and that seems to fit right now. Questioning gold’s role as a portfolio holding gained momentum in the media and blogs as equities continued to rally which is in part about impatience which to the intro of this post is one behavior that does investors in. This ties into a slightly bigger concept or investing belief about defense being more important than offense or as I’ve described it; smoothing out the ride. Using gold to help with that objective can be done without having to be very tactical with it; you own it and without having to figure out when equities might turn down, you have the position in place for whenever they do. Clearly this does not resonate with everyone; if it does not resonate with you then you probably don’t own any gold and if it does resonate with you, then you do have some gold but the time to make this decision is not now when volatility is sky high and emotions/indecision might also be elevated. Bigger picture still, is the importance of remembering why you chose whatever you chose for your approach to investing and knowing what type of market environments play to your approach’s strengths and weaknesses. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com .

Understanding Covered Call CEFs

Barron’s recently had a favorable write up on closed end funds that one way or another use a covered call strategy as a means of providing income. The article proposes that volatile markets like now are a good environment for this niche and that the call premium can help mitigate the impact of large declines. I think both points are flat out wrong. The history here is that they do well in rising markets. By Roger Nusbaum, AdvisorShares ETF Strategist Barron’s recently had a favorable write up on closed end funds that one way or another use a covered call strategy as a means of providing income. Where the article focused on CEFs, the yields can be quite high because of the leverage that CEFs often use as well as returning capital, when necessary to maintain a payout. It is also worth noting that there are traditional funds that sell calls and ETFs that sell calls and puts too for that matter. I wrote about these quite a few times in the early days of Random Roger. The history of them shows long stretches where they do very well then long periods where they get pounded and then repeats. Based on chart below they got crushed in 2008 and the dividends were cut on many of them and neither the prices or payouts have recovered since. The article tries to make the case that volatile markets like now are a good environment for this niche and that the call premium can help mitigate the impact of large declines. I think both points are flat out wrong. The history here is that they do well in rising markets. The chart from Google Finance captures a whole bunch of them over a ten-year period. I removed the symbols for compliance reasons but finding funds in this space should be easy to do. If you play around with the time periods you will see they did very well in 2006 and far into 2007, 2009 well into 2010 and then a three year run from 2012-2014. As mentioned the got crushed during the bear market, did badly in 2011 and are having mixed results in 2015. (click to enlarge) I would have no expectation that these funds can buffer a stock market decline. These are income vehicles but they track the equity market higher to an extent (they correlate but don’t keep up) and I would bet they get hit hard in the next bear market but probably not as hard as 2008. Part of the equation in 2008 was a shutting down of bond markets which impacted CEFs in terms of accessing leverage. I don’t expect that to repeat but I would want sell in the face of a bear market as a 30% decline seems plausible for these funds in a down 40% world. Obviously there would be income vehicles to keep in a bear market but I don’t think these are one of them. Where they do well, then do poorly, they will do well again, maybe after the next bear market maybe sooner but anyone interested in this space probably needs to be willing to be tactical and be willing to sell after a period of their doing well. Interest rates have a very good chance of remaining inadequate for many years even if the Fed does hike rates this month. Attempting to be tactical is not right for everyone but I do think that the way investors get their yield will probably include market segments that require a more active and tactical approach.