Avoiding Errors and Reducing Costs by 5%
My Investment Checklist & The Holy Grail of Credit Card Portfolios
Welcome back!
What I felt was most important last week
Fitch Downgrade of US Treasuries
The downgrade provided an excuse for the market to take a breather. We got our first 1% sell-off in the S&P500 in more than a month. The Vix showed some signs of life.
If you subscribe to this, you’ve undoubtedly read about the downgrade in various papers and probably other substacks so I won’t add much to your discourse. I’m in the camp of while this doesn’t mean much on its own, it is another brick in the wall of pressure on US rates. As of now, 14% of our budget goes to debt servicing. The US is running the largest peacetime deficit, by a significant margin, despite unemployment being low. Neither party will touch entitlements, which will have to be handled. We are potentially pausing rates while the rest of the developed world raises theirs, making their debt more appealing. We are continuing with Quantitative Tightening. The only options we have to get out of this are fiscal restraint, which neither political party will do, or inflating our way out. We’ll see how that goes over the next few years.
That said… a friendly reminder to those looking to run out and short long-dated bonds
Thoughts on the market
Based on CTA positioning (GS expects CTA’s to dump even in a flat market due to them being extended) and options euphoria, I continue to suspect we will take a pause on this market run. I’m short a bit of IWM and own some SPY puts to offset this. To be clear, this is a call on the next month or so, not a call on a major market turn.
Heard from my friends
Sadly nothing. My friends failed to provide me with anything of value. For friends reading this, be better.
Things that WERE NOT important… but I enjoyed
Babies on planes: On some regional jets (at least Embraers), mothers with lap infants cannot (if the airline is on top of this risk) sit on one of the sides because there are no extra oxygen masks on that side. Found that out while being delayed at the Westchester County Airport.
Catholic Priest Family Hack: If you want to be a Catholic priest BUT you’d like to marry, there is a hack. First, become an Anglican priest. Second, marry. Third, convert to Catholicism. Granted, you need to be a straight male so that might be the actual first step; but if you’re looking for a career change and to have your cake and eat it too, this could be a good path.
Time to Short: My general mood for shorts at the moment. As a side note, to the extent he continues to post as he keeps pulling off the platform, Thunderdome is an entertaining follow.
Greenhouse Gases: It’s incredible how much more CO2 efficient the US is now
Born-Again Tyler Perry: Every 5-8 years a movie that targets conservative Christians gets pan-US distribution and everyone remarks as to how much money it makes. Sound of Freedom was originally owned by Fox but Disney dropped it when they purchased the studio. It’s surprising to me that there isn’t a Tyler Perry of conservative Christian movies who produces these and has accomplished contracts with theaters to distribute to this demographic.
Peak US Women Soccer: The US Women’s Soccer team lost for the first time in a World Cup before the quarter-finals. This comes two years after their disappointing bronze medal at the Tokyo Olympics. A friend of mine who is far more knowledgeable on all things Sport explained to me this is likely the beginning of the end for dominance in soccer for the US women. The US traditionally held significant advantages in the sport due to competitive high school AAU leagues, Title IX fielding soccer teams at colleges, and misogyny in most of the world keeping women off the pitch. In the last twenty years, though, European football clubs started to invest in female club teams tied to the men’s clubs and now have very active developmental leagues. This type of training has proven to be difficult for the US men to beat and I suspect we’ll see that the US women will go from the dominant team to a ‘pretty good’ team. Great move by them to secure higher salaries while they were still hot.
Watch Fraud: I used to see this guy and his associates all the time at a coffee shop I worked from. I was surprised by how much money they were making selling watches given the cars they drove. Guess it’s easier to make money just stealing them…
The Timepiece Gentleman Admits Wrongdoing
What could go wrong with letting them sell your watch? Biden Triumphant: If Trump can’t be bought off by a wealthy donor who floats his legal bills or if he doesn’t pass, I don’t see a world where some variation of this doesn’t play out for the Republican Party. Without those scenarios, he’ll either be the nominee or he’ll play spoil grapes and tell his followers to stay home while he has these quite public legal battles
I LOVE the RyanAir Twitter account
Stock idea/lesson/process of the week
Change of pace from the last two weeks with stock picks, I am going to delve into my investing process this week.
How I approach investing in a new stock
When I was a hedge fund analyst, I created a checklist to help me cover all bases as I researched a position. When I ran my hedge fund, I expanded the list and made the analysts fill it out before anything went into the portfolio. Now, running my own capital, I force myself to complete a checklist before I put on an equity position of 1% or greater.
Successful active investing comes down to avoiding unforced errors. To do so, you have to have an honest review of what your personal weaknesses are. For me, it’s being too hasty to jump into a position. Utilizing this checklist gives me pause to fully evaluate an investment that sounds exciting. Further, there are items on it that keep me out of situations, like companies with high debt loads, where I have found I trade the names terribly.
Here is my personal checklist. I welcome any items of your own that you utilize before you invest or any questions you have about mine…
Source of investment
Is there a street D/G or U/G affecting this? If so, wait a day [I find that reactions to analyst notes get faded]
In three sentences, what is my thesis and what is the risk to it?
Are there any red flags in the 10K?
If relevant, has this been a compounder over the last 10 years? 5 years?
What are the drivers of my win/loss scenarios? How likely do I see each scenario?
How has this business historically performed? How has it done vs the S&P? What is different now vs five years ago?
How does multiple compare vs history? Has the business changed in a way that should affect that (growing faster or slower?)
How does chart look? [You want to be able to benefit from momentum. Calling the bottom on a stock is a fool’s errand that people try to do to sound smart]
Where does the company sit vs. its 50, 100, 200 day moving average? Any place to set an alert to potentially get involved?
Any interesting traits (fallen angel, new CEO, improving margins)?
Any negative traits (several CFOs, sharecount that has exploded)?
What are revenue growth trends?
How does RoE / ROIC compare vs history?
What metrics are improving? Getting worse?
Look at the last 10 years of margins. How steady are they? Any indication we could be at peak?
Does currency or inflation have a noticeable effect on margins? If so, have they been a headwind or tailwind?
What is the short interest and how is it trending?
What is the cost of borrow?
Any red flags on the balance sheet?
How do margins and multiples compare with comps?
Is there a 60% owner of the stock or another reason why the float is small in relation to the overall sharecount?
What has the company done with cash (invested, paid down debt, returned to shareholders, wasted on bad M&A)?
How long have the major officers - CEO, CFO, VP of Sales - been around?
Did the company recently change its management's comp structure?
Check factset for how street EPS estimates have changed in past 90 days. Is sentiment improving or lowering?
Does the company give guidance? Annual, Quarterly, or both? When is the next update to guidance?
Are there any acquisitions that the company laps soon? What effect have these had on revenue / earnings?
Look at proxy for related party transactions, familial relationships, shareholder unfriendly pay packages
Look at Glassdoor for potential employee red flags
Are any activists involved?
Read the last three call notes - what is the general tone, any red flags, and what parts of the business do analysts most care about? What are metrics that are forecasted? Highlight given metrics that may not appear elsewhere
What does the sell side think the drivers of valuation or re-rating are?
How has the company been doing vs guidance?
How has the company been doing vs the street? [From the standpoint of how well do they manage the street]
Have I checked VIC for pieces on it?
What is the next catalyst? Have I set an alert to remind myself of it?
Have I checked insider trades?
What is the debt / ebitda? If not currently under 3, DO NOT invest
How has debt level changed over last 5 years vs ebitda?
Has the company done any recent acquisitions that change the story?
What has happened to sharecount over the past five years? If it has exploded, not something I want to be in
What is my exposure to similar themes / company structures?
What do I feel my risk of permanent loss is? What would create that loss?
Do I understand the drivers of this business and industry? If so, what are they? IF NOT, DO NOT GET INVOLVE
Add the stock to my factset watchlist to monitor news on it
Would I tell my friends about this trade? If not, why invest?
Add stock to Washington insider trading screen
Add an alert where I would get out of this for risk controls
What is the risk that the loss scenario is not the ultimate loss? What would cause and how much lower?
How does the price target look vs other names I'm in? Based on that, what relative size should this name be?
Win Scenario(s) and % chance / Loss Scenario(s) -> Do I get out hard at this scenario? % chance
Things That Bring Enjoyment
Peak Credit Card Portfolio
At the request of a friend, behold my mildly OCD credit card strategy.
I value my time too highly to follow what Reddit / point-chasing idiot savants do, but I have set up my life where everything but my mortgage / private club memberships nets me 3-5% cash back. To achieve this, I do have several cards, but I only carry three and that will probably drop that to two at year-end because I’m questioning the value of the Chase Sapphire Reserve.
Here is how I do it:
First Tier → Workhorse Cards
Bank of America Premium Rewards Visa Signature - This is in my wallet
Best Features
As long as you keep $100k+ in a BoA or Merrill Lynch account, you get 3.5% cash back on travel and dining and 2.63% cash back on everything else. This $100k level also gives you some other perks with checking, mortgage, etc.
This card has a $200 travel statement credit perk that easily allows you to offset the $95 fee by purchasing a travel gift card from major US carriers. So this amounts to a no-fee card.
No foreign transaction fee. All other high cash back cards (IE Fidelity’s) don’t have this feature.
Thoughts
This is the best cash-back card out there. Bar none. Frankly, it’s the card that most people should have as the redemption is easy and few people utilize points well: they just store them up or use AmEx points for terrible exchange rates like Amazon payments.
I use this card for everything that isn’t otherwise outlined below. I travel with it. I pay my taxes with it (you make an 80bps spread and carry the cash another month, meaningful if your taxes are 6 figures+). If you have one card, it should be this card. There is literally no downside to this card.
Schwab AmEx Platinum - This is in my wallet
Best features
5x points on flights you purchase, which comes out to 5.5% back at the Schwab rate outlined below
The fine hotels / resorts program has good perks (upgrade if available, free breakfast, early and late check-in/out) at great hotels in most cities. I’m using it for my stay at the Mandarin Oriental Tokyo in January. This program also provides 5x points on those bookings and often has a stay 3 nights, get a fourth night free offer.
The international airline program generally saves a few hundred $$ on international business / premium economy tickets
Free Clear, $200 in uber cash, $200 in fine hotels/resorts credit, $300 equinox credit, $240 in digital entertainment (I use for Audible and NYT), $100 in Saks credits. These benefits more than offset the card’s cost.
Various status perks (Marriott Gold Elite, Hilton Honors Gold, Hertz President Club). I particularly like the Hertz perk as you can just walk to your car at most major airports.
Travel delay insurance: If your flight (after you’ve left the home airport) is delayed by six hours or more, you get $500 to spend on hotels, dinners, ubers, clothes, etc. I’ve used this once a year since I’ve had the card
I find the offers they have on their website / app to often be an interesting way to save 5-10% on brands I like (Oliver Peoples, Ferragamo, etc) or a way to be introduced to new brands (I recently tried Hint water because of a 50% off deal). I’ll do a quick browse when I check my bill each month.
Access to Centurion and various priority pass lounges. These had started to get quite busy though they’re starting to free up as AmEx changed their policy to only allow cardholders into Centurion lounges for free.
There are also the other insurance benefits (car rental, lost baggage, general trip insurance if your flights get canceled and you’re out hotel money)
Mild benefits on Resy in terms of more dining slots and preference on waitlist at some restaurants
Free Walmart+ Account. It’s not terrible vs Amazon actually. But the real benefit is the .10 back you get per gallon on Exxon/Mobil gas and the free doordash benefit.
Thoughts
This is a great card if you use most of the benefits, which are easy to do though I frankly notice almost none of my friends do.
I personally find points less helpful than cash back. There are services that will utilize your points to monetize them well with travel partners for great airfare deals. If you can’t find one, you can look around to find good airline points deals to transfer to, which is frankly too much work for me. Being in Dallas, the points are not worth much for transferring to other partners as OneWorld doesn’t really participate. The points are also not worth much if you try to monetize them for cash (they only give you $.006/point). You can utilize the points to pay for hotels and flights purchased through the AmEx portal, but you’re giving up on the 5x point bonus.
This is why I highlight the Charles Schwab AmEx Plat. The BEST way to monetize points if you’re not going to hunt for transfer partner deals is by getting a Charles Schwab trading account, getting a Charles Schwab Amex Platinum card, and using the points to transfer into your CS accounts. You get $.011/point, nearly 2x the normal cash conversion. Further, if you keep $250k in assets with Schwab, you get an extra $100 back a year on the fee. $1mm, an extra $200. Not enough of a bonus to move money over for that but helpful if you already have assets there or if you just use basic brokers like Schwab or Fidelity.
PayPal Cashback Mastercard
Best Features
This has one feature - 3% cash back when you pay for things with Paypal. Which is quite common for online purchases, even for recurring ones like Spotify.
No fee
Thoughts
Great card in that it’s just cash back, 70% of online purchases accept Paypal so this gets used frequently.
Chase Amazon Rewards Card
Best Features
If you have an Amazon Prime account (if you’re reading this and in the US, that’s a given), this card gives you 5% back on Amazon / Whole Foods / Amazon Fresh.
No need to carry the card given you can use your Apple wallet at Whole Foods to pay with it.
Thoughts
Easy 5% cashback on Amazon and related places. No fee. No reason to not use this card.
2nd Tier → Probably don’t need but I currently have
Chase Sapphire Reserve
Best Features
$300 back when using it on travel
3x points on travel and restaurants, which at the 1.5x multiplier when booking travel through them comes out to 4.5% back
Time limited Lyft / Instacart / Dashpass benefits
Various other travel insurance perks
Thoughts
This used to be the ideal card for people who travel. As I age out of the time limited perks, I find myself questioning why to keep this. Unless they provide new perks before my Dec renewal date, I’m dropping this card. Benefits are similar to the AmEx platinum but generally a little worse
US Bank Cash+
Best Features
This card has 5% categories, the ones I care about being utilities and gym. Once a quarter I have to let them know to keep those categories and I just keep this autopaid.
Thoughts
Limited benefits (5% back in two categories) and having to renew each quarter (which is easy but could be annoying) might not be worth it to everyone. I like it but YMMV