SKEPTIC’S GUIDE TO INVESTING
Straight Talk for All, Nonsense for None
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Your Hosts - Meet Steve Davenport, CFA and Clem Miller, CFA as they discus the latest in news, markets and investments. They each bring over 25 years in the investment industry to their discussions. Steve brings a domestic stock and quantitative emphasis, Clem has a more fundamental and international perspective. They hope to bring experience, honesty and humility to these podcasts. There are a lot of acronyms and financial terms which confuse more than they help. There are many entertainers versus analysts promoting get rich quick ideas. Let’s cut through the nonsense with straight talk!
Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
SKEPTIC’S GUIDE TO INVESTING
Rethinking Retirement: The Closed-End Fund Strategy
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Retirement investing has lost its way. While Wall Street fixates on asset growth and total return, millions of retirees struggle with a fundamental question: how do I generate reliable income without depleting my savings?
Steve Selengut, veteran investor and former RIA owner who managed $100 million in assets, challenges the industry's growth-obsessed paradigm with a refreshingly old-school approach. His investment philosophy centers on four principles largely abandoned by today's advisors: quality, diversification, income production, and systematic profit-taking.
Unlike conventional strategies that rely on selling assets during retirement (the problematic "4% rule"), Selengut's approach creates multiple income streams through dividends, interest payments, and strategic profit-taking. This methodology recognizes market cycles as opportunities rather than threats, allowing investors to average down during downturns and harvest profits during upswings.
At the heart of this strategy lies an often-overlooked investment vehicle: closed-end funds (CEFs). These actively managed portfolios trade like stocks while offering exceptional income potential—typically 7-10% yields compared to the paltry 1-3% from traditional sources. For retirees seeking monthly income without touching principal, CEFs provide a compelling alternative to conventional bond and dividend strategies.
Perhaps most importantly, Selengut demonstrates how focusing on income growth rather than market value creates a more resilient retirement plan. While portfolio values fluctuate with market conditions, properly structured income portfolios can grow their cash flow year after year, providing peace of mind regardless of market volatility.
Whether you're approaching retirement or already there, this episode challenges you to reconsider what really matters: not the size of your portfolio, but the reliable income it generates. Ready to rethink your retirement strategy? This conversation might just transform how you view investing for the rest of your life.
Straight Talk for All - Nonsense for None
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Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
I'm already having fun.
Speaker 2:Hey, I'm Steve Davenport here from Skeptic's Guide to Investing and I'm with my partner, clem Miller, and today we have a special guest to talk about retirement income, wall Street and all things in the market that help you produce a stream of income that you can live on and feel comfortable with.
Speaker 2:Produce a stream of income that you can live on and feel comfortable with. Steve Selengut is an accomplished author brainwashing of the American investment and retirement investing income, and he's been around this market. He's run an RIA, sold an RIA in 2023 that had about $100 million in assets in it, and I think that Steve has been around the markets and has been around this whole concept for a while. So we're going to have to call you Steve S versus Steve D. But, steve S, welcome to Skeptic's Guide to Investing. We're glad to have you and I'd love to hear your perspective on retirement income and how to get started, because Clem and I are both trying to figure it out and, as CFAs, we have this theoretical view of the world that sometimes actually conflicts with the actual view of the world.
Speaker 1:Well, I can understand that and I've been told that my approach is new and different, when in fact it's really old and one that really had been practiced when I first started in the investment world and I was creating and managing accounts for people and I told a broker you know, this is an old couple, we've got to focus on income. So let's find some bond unit trust and Ginnie Mae type things and individual muni bonds and stuff like that, and we'll only use our normal stocks, but we'll only use the ones that have the higher dividends. And that was fine with him. He was getting commissions on everything, he was getting markups on the bonds and so forth. So you know, that was all rosy and neither one of us cared about whether the market value went up as fast as the Dow did or something like that. We didn't. We just cared that the guy had the income he wanted and he didn't spend it all so we could continue to grow the income.
Speaker 1:Then we went to the era where commissions were no longer the way to go and everybody was like I was getting a fee at the time and now all of a sudden, the brokerage firms are getting the fees and I was getting a piece of the fee, and I was getting a piece of the fee and the whole attitude in the investment world changed that it doesn't really matter what your clients want. You have to do something that grows the market value, the AUM, because that's what we hired you to do. You grow the AUM and you make more money and we make more money. It doesn't matter if the client makes what he needs. And they'd never spelled that out in words. They call themselves fiduciaries and said we have your best interest at heart, but of course they're the ones that determine what your best interests are, instead of asking you.
Speaker 1:So that's where we are now in the investment community. We're in an AUM-focused damn. Everything else. The market value has got to go up, and if it doesn't go up, it's not our fault. It's because planes flew into buildings or just a country attacked that country or this guy is doing tariffs. There's always an excuse. It's not our fault. You know what we have you in with the models that we've created that are suitable to you will get you to the end, and then we'll systematically sell your securities, probably the losers, because we know you like to see green and provide you with income that way and hopefully at 4% a year. It'll still be some of it there when you die. And I say you know that's really BS. I mean, there are a dozen that I can name, will you?
Speaker 2:explain that term BS, Because we've never heard that before.
Speaker 1:You've never heard that. Where'd you guys go to school?
Speaker 2:It's from Georgetown, so they speak foreign languages.
Speaker 1:Georgetown yeah, I would never have been able to get into Georgetown.
Speaker 2:My granddaughter- I went to Columbia and there was all engineering talk about structures and buildings and there was this guy Buffett in the business school that believed in granddad or something. Anyway.
Speaker 1:I'm a big fan of Buffett. He was a quality guy.
Speaker 2:I'm a similar type of quality guy myself.
Speaker 1:Not many people talk about quality. I have four principles Quality, diversification, income production and profit-taking. I think the profit-taking is not something that either of you guys do, because you're more growth orientated. I don't just look at one stream of income. I actually have two, possibly three streams of incomes in the portfolios that I encourage people to set up. And there's the distributions, ie dividends, the profit taking on complete positions, and then you get into the idea that we really live in a cyclical market environment.
Speaker 1:Two cycles are particularly important the interest rate cycle and the stock market cycle, and you can determine exactly where you are right now and whether you're part of an upward or downward moving thing, but you have no idea where it's going. So you make your decisions to anticipate change. If you're at the high of a market, you buy less of stocks. If you're at a high interest rate environment, you know that the interest rate sensitive securities are down. You buy more of them, or a normal amount at that, and then, when they fall again, you buy less of them so that you can average your cost on the way as it moves in the other direction. I don't just average, I always take profits when they go up.
Speaker 1:So the third stream of income that I create, since I'm buying on the way down. I start with $5,000. The market goes down, my cost goes down 10%. I buy another month or two, I buy another, and so on. Eventually the market goes back up. Those last in, first out type things. They may go up 6%, 7%, while the whole position is still in the red. That doesn't make them any less of a profit and in today's environment you can sell them at the profit.
Speaker 1:So I developed that third stream of income. So my focus quality diversification income. I don't know if it's certainly not similar to the Wall Street. I've never in my life bought anything that didn't pay me a dividend. My dad, who got his master's degree at Columbia, nice, and my granddaughter is thinking about applying to law school in Georgetown and we're discouraging her because, a I don't really want to pay for it and B she can start at South Carolina and get her, because, a I don't really want to pay for it and B um, she can start at South Carolina and get her feet wet and then maybe transfer or something like that. When she's got, she knows she's really going for it, but we'll see Anyway, um, so when, when?
Speaker 2:I started.
Speaker 1:I've been talking a lot.
Speaker 2:I don't know if I answered any of your questions yet no, I think we're more on the same page than we're on different pages. I grew up in Boston and started in the business at State Street and I had a lot of old Yankee clients who lived and died by the rule of never touch principal. And always, you know, you live off whatever income the trusts provide, but you don't touch the principal. And it seemed like a very archaic view at one point, but now I start to see the wisdom of okay, when the assets are producing the income, and you, you know you, you should plan on that income. You shouldn't plan on hey, I want a 6% distribution and my income is four, I'll just take the six. And you know we, we know that this rule has a belief that you know these companies long-term will go up, but you don't want to be living off of that going up or down. You just want to focus on the conservative aspect of whatever the dividend yield is. And some of those old Yankee ideals.
Speaker 2:When I moved to the South, everybody was about oh, it's total return, it's total return, you should focus on total return.
Speaker 2:And then I said well, which names do we sell? And so I developed a process for individual selling where I look at Bollinger Bands and I look at the 100-day moving average or the 150-day moving average and when it's significantly one or two standard deviations above that moving average, that's a signal to sell, and when it's below that it's a signal to hold, and when it's below that line that's a signal to potentially buy more. So I think that in some ways you're talking about peaks and cycles of interest rates. I never really focused much on the interest rates. I just said whatever the interest rates are, whatever things are in the market, is in the price. The market knows what the interest rates are. The market knows what IBM is and what Coca-Cola is. So if they determine the price to be two standard deviations above average, they've got some reason and I don't have to determine every reason to know that it's above average. I mean, I try to keep it simple, steve. I'm a pretty small brain so it doesn't make sense for me to make it too complicated.
Speaker 1:The KISS principle applies Absolutely.
Speaker 3:Steve, yeah the KISS principle implies Absolutely. I was going to ask I'm intrigued by your profit-taking methodology. What signals do you use to determine when to take a profit?
Speaker 1:I set a target for everything I own, even when I first started, when I was doing stocks back in the 80s. I started investing other people's money in 79. But I had already made my quote fortune at that time trading high-quality dividend-paying stocks, time trading high quality dividend paying stocks, and I always set targets and was never and I was never reluctant to go back into the same stock. I mean, my first stock I ever sold was Royal Dutch, but I also at the time I I owned all the big names IBM, ge, general Motors you know all the things in the healthcare sector and we always we studied their individual sector cycles and individual cycles and they're always up and down and I saw, I saw opportunities in these things that you know, up and down swings of 10% in each direction often. So I figured I said, what if I just set a 10% target? You know I buy something. I set a 10% target goes 10%, I sell it, I wait until it goes down again, I buy it again. And that's what I did. And because of the general upward trend of the markets, you didn't have to wait necessarily for it to go down 10 to rebuy it, because the whole markets were in an upward trend, even even the you know, for we've only had four major corrections since I started and every time it may have taken a year a little more to get back to where it was, but it always has gotten back to where it has and I I don't see that changing. We haven't had a significant rally or a correction in a while, but still. I mean, those cycles are always there.
Speaker 1:So I always had a target when I switched and when I switched to closed end funds. And you know what? The main reason I really went all whole hog into closed end funds was really on the income side of my portfolio, because you guys, I'm sure, are familiar with the, the aggravation and detail and just agita of buying individual bonds and trying to sell those bonds, even if they're up at a premium to sell them and what your, what the markup does to what you think your profits are and and the accrued interest and all that other garbage you had to go through when I discovered that I could go out and buy a portfolio that contained 360 different municipal bonds for 14 bucks a share Whoops, sorry about that For 14 bucks a share and earn more in income tax freefree than I could with individual bonds. That was really a eureka moment to me.
Speaker 1:At that point I took, I'd say, $60 million, maybe $50 million, of my client's money and moved them into corporate bond, preferred stock, municipal bond, blah, blah, blah, all the different types of closed-end income funds and by the early 90s my income focused, my income more than doubled for my clients because of the closed-end fund vehicle and I was getting the money paid monthly instead of every six months. I mean, give me a break. This is the best thing since sliced bread, did you?
Speaker 3:Oh sorry, Go ahead.
Speaker 1:Yeah.
Speaker 3:I was going to ask you how you look at the discount. I mean, do you always require a certain discount on the closed-end funds?
Speaker 1:no, not at all. You know, I think that's a that's, that's a wall street ism. Somehow they had to come up with a way of. Well, these are different mutual funds. Trade at their net asset value. And now, of course, which etfs? The etfs weren't even a blink in the eye when CEF started. Actually, they started before mutual funds, and they've never, ever, been tied to price. The price is supply and demand. The NAV is the value of what's inside the trust. So you can have interest rates threatening to go up. That nav is going down for a while, nothing's changed, but it's going down just because interest rate expectations have gone up. So, and if, if, if I still am, I still want that seven percent that my closed-end fund is paying and everybody else does too. We're not going to sell it just because the NAV is lower. It doesn't matter to us, because the NAV going down doesn't change the amount of distribution. Those securities inside are still paying the same interest whether their prices are up or down. Nav is meaningless, it doesn't mean a thing.
Speaker 2:Well, that's taking the same philosophy of stocks, right? We're not supposed to look at the price today, because we're holding it for a longer period and if you make that one leap in any investment you're going to make a better return. Because we know that turnover is kind of the enemy of success, right we?
Speaker 1:know that turnover is kind of the enemy of success, right? Yes, and back to the NAV thing. Every stock has a book value. How many stocks in the marketplace do you think trade at their book value per share? Very few, exactly. And the ones that are at a premium, do we hate them because they're premium? No, they're the ones everybody wants to run into because they're up in price, right? So those are the most popular ones, are the ones that are selling at the biggest premium of all. And when people look at closed-end funds, they say I don't want to buy that, it's at a premium. Well, look at Nvidia. Look at they say I don't want to buy that, it's at a premium. Well, look at NVIDIA. Look at Tesla, look at this.
Speaker 2:Look at that. It's totally…. You prefer the weighing mechanism versus the voting mechanism. I'm sorry, the what you prefer looking at stocks and weighing their value versus voting on their popularity.
Speaker 1:Yes, I'm trading. I'm trading on their popularity.
Speaker 2:Trading on their popularity, but not necessarily weighing your buy choices on popularity.
Speaker 1:No, I don't buy when they're up, I sell when they're up and I buy when they're down, because I vetted the quality, I know what they are. You know, if I were in the stock market and you know, the Exxon Valdez happened, right, you guys remember that. All that oil over the North Pacific up there by Alaska, right, what happened to Exxon Price? Right, I bought Exxon for almost every one of my clients at that point and not too long later we had our 10% profit and I was out. So you know, it's the same thing. If you've got the quality and it's a known quality, quality of known.
Speaker 1:I look at closed-end funds. I don't buy any unless they're at least five years in business. They've got to own at least 50 different positions inside, not 30, 50, okay, they've got to have a distribution history that I can look at for years and have stability. If it's gone up or down, I can determine why. Well, it went down when interest rates went down, their distributions went down, their price went up. But after a series of years, just like now. You guys know that and this is the way a lot of people look at the closed-end funds now. Why are they down so much?
Speaker 1:Well, before 2008,. We had scores of years 50, 60 years where 5% was low interest rates. What were your first mortgages at 5% was low interest rates up until 2008. At the end of the financial crisis, for whatever reason, interest rates went to almost zero and stayed there for almost 12 years. So the generation of today we're talking about 5% right now has high interest rates. Yeah, okay, so there's your difference right there. Before the financial crisis, you had all these years of even double digit. I remember buying New York Port Authority municipal bonds yielding 12% coupon. So you had these years and years and years of higher interest rates before the financial crisis. And you look at any chart a long closed-end fund, the chart is up here. Then the financial crisis and then, all of a sudden, the chart's down here and everybody says, oh my God, look how the price went down. Well, that's why the price went down. These are all bonds, bonds, mostly bond funds, high yielding securities. They can't get 10 paper anymore. It's gone, it doesn't exist anymore.
Speaker 2:So that's how would you compare, like a closed-end funds to a reed, because both contain multiple investments, both have different cash flows and one of the questions I've always had about closed-end funds is is there a management fee or is there some type of overhead that we're paying for that? When we think about the closed-end funds, we don't necessarily attribute it like an investment management fee, just like in REITs. We don't think about the management of the REIT as an expense, but it is built into the overall yield.
Speaker 1:It's absolutely built in. It's absolutely built in and it can be as much as 2.5%, just like in a REIT. It can be even more, but it includes. I don't know if REITs use leverage or not, but closing funds can use leverage up to 50%. The average is about 30%, which is lower than the average stock in the New York Stock Exchange, but that's also one of the things that go into that. Decalculation is that. But the yield is after expenses, after expenses. So these things aren't allowed in 401ks, which is probably a good thing because they don't have the volume, but they're not allowed in there because their costs are high. That's why Vanguard and all the other mutual funds came up with these 0.5% fee funds so they could be in these REITs, because the government set that limit at over 2%. If your fees are over 2%, you can't hear, because the government believes that 3% yield after low expenses is better than an 8% or 10% yield after high expenses yield after high expenses, you know, is that still?
Speaker 3:you think that's still going to be the case now that they're lightening up on restrictions regarding other things like crypto and pe and oh man, I don't know what the hell is going well um I mean, I'm skeptical about all that stuff, but you would think you'd think they'd put it in closed-end funds. Um, you know if they're going to put in all this other stuff.
Speaker 1:Crypto has almost an unlimited supply right.
Speaker 3:Ultimately it does.
Speaker 1:Yeah, closed-end funds are different. They're fixed theoretically. A limited number of shares are out there. If they were to put those hundreds of billions of that type of money in there, the prices of those things would get their yields down to the point where they aren't split unless they somehow they don't do splits, they do reverse splits they do. They can do rights offerings. So you'd probably see some pretty hefty rights offerings going on. But I mean, if you were to take hard to say you say I don't know how long the pleasure of closed-end funds as long as they're a mystery to most people, they're a wonderful, wonderful source of income, then it's a whole different ballgame and they may have to reinvent how they set up their IPOs and how many shares they can, if they can add shares over time. It's a question I hope I don't have to answer for my advisees and people now. I don't know.
Speaker 2:Tell us how long you're going to be around and then we'll know how long CEFs are going to last. Okay, Because it sounds like you're a pretty strong supporter.
Speaker 1:Oh, I'm a strong supporter and I've got a lot of strong supporters, I've developed a lot of strong supporters of them, but you know they're not popular. Where it counts, I mean the advisory services, the advisors themselves. I mean you can call up and ask them and some will not even know what you're talking about. I use LinkedIn and I put in I'll put in a fidelity screen that shows the projected annual income on a portfolio of $400,000. And even though it shows fidelity, I won't get anybody saying how'd you do that? Or how does he do that, how come? Why, what's in there, you know? Or how big is that portfolio? That's got to be a $10 million portfolio. It's not.
Speaker 2:I think there are some people who worry about the closed nature and understanding everything that goes on underneath. Right, I think that I can. I mean, when I think about investing, I think about this thing kind of I call it the messy middle. And it's where you've got the bonds over here that you're pretty sure you understand, because they're pretty high quality. Corporates and governments get into what I'll call equity-like vehicles, such as REITs, such as preferreds, such as convertibles, such as munis and things that have characteristics that are slightly different than these riskless bonds. And so when I look at your closed-end funds and I think about them, when I look at your closed-end funds and I think about them, where do you think they fit on that continuum of risk and return? I know they're high on the return side, but we must be taking some theoretical risk in order to get that it feels like it's illiquidity because these things are so lightly traded.
Speaker 1:Yeah, okay, the illiquidity is not something. It rarely impacts your trading, even as heavily as I trade. And now I've got 550 people in my RMS community and they're trading, and very rarely do you say anybody say hey, I was told I couldn't, I couldn't trade that anymore, or I wasn't able to sell this because there are no buyers, or I wasn't able to buy it because there's no sellers.
Speaker 2:You just don't get that in the communications yet, right well, I think I remember in march of 2020, when everybody was saying the muni market is shut down and therefore, you know, I want to sell my munis, to buy the market that's corrected and I I can't get a price on my munis or I can't get a good price on, and so I don't think the average day I agree with. On average, if I can be patient, as you said, most investments will overcome this illiquidity. But the question is is there still going to be a moment when you don't want, when I want, to get out and buy some of those stocks that have corrected that? We will? You know, were there problems in 2020? Were there problems in 2011? Were there problems in 2008?
Speaker 1:There was never any problems trading the closed-end muni bond funds. I can understand why the individual bonds might have had some trading difficulties, because they are individual transactions between you and me. I've got a piece of paper for sale. You want to buy it from me and we have to agree on a price, but closed-end funds trade like stocks and but but all my point is is that they they did go down during those.
Speaker 1:But the stock, they were stocks and they they are not impacted by the same thing that impacts the securities inside them. When you sell a municipal closed end fund, you're not selling the municipal bonds, you're selling a stock in the trust that holds those municipal bonds, so you don't have those kinds of liquidity problems. And the same with preferred stocks. When I was growing up investing and I had individual preferred stocks for people, yeah, there were times where they were tough to buy and sell, but when you have a portfolio of them in a closed-end funds they're just like that.
Speaker 3:It's never, never a problem never do you look at yield also as a valuation indicator?
Speaker 1:that's a valuation, not really because interest. If you study interest rate sensitivity and just when you see yesterday what was the news, you know, the interest rates just went up again, or the yields just went up because all the prices went down, because they're now concerned that interest rates are not going to be cut, maybe in September. So the whole little ups we had before that, or downs in yield, ups in price, just reversed itself in one day because it got some news came out that said they may not be able to lower interest rates. Frankly, I don't think they should be lowering interest rates in this environment either. But you do have that volatility which is always a buying opportunity. How do you spell correction? O-p-p-o-r, you know, et cetera. You know, really, I mean one thing as an investor that you got to learn and that you have to coach your clients in as an advisor is that there has never, ever been a correction that didn't, that wasn't replaced by a rally, and vice versa right, don't get so go ahead oh sorry.
Speaker 3:And how do you look at um quality? Why? How do you what? How do you define quality in in your world?
Speaker 1:well my world used to be when I was buying stocks. They had to be profitable companies that paid dividends. The dividends at that time were for two reasons. One, they respected their shareholders enough to pay them something, and paying dividend indicated that they were profitable, that they had money to give them. Paying dividend indicated that they were profitable, that they had money to give them, and if they ever cut a dividend, you knew that that was the time to get out of that company, Because they don't want to ever do that. It's got to be a really problem for them to cut a dividend. So there were two reasons and I always had diversified. Diversification was a big thing. I used to look at PE ratios and I used to look at debt-to-equity ratios and they had to be reasonable. Do you know what the PE ratio is on the Dow Jones Industrial Averages today?
Speaker 3:No.
Speaker 1:And do you remember what it was back in the 80s?
Speaker 3:Yeah.
Speaker 1:Like seven right.
Speaker 3:Yeah.
Speaker 1:In the 80s, yeah like seven right yeah in these and a zero.
Speaker 3:It's really no like 40, something like 40 to 1 now. Well, the Dow has, as the Dow also has, changed its constituents as well as become absolute more growth II more growth II.
Speaker 1:Yep, they even have things that don't pay dividends there now. And look at how the S&P has changed. The S&P is almost a mini NASDAQ Not quite, not quite, but how many days do you see? The Dow is up or down and NASDAQ and S&P are the opposite. You know the NASDAQ's always been that way, but the S&P has changed a lot.
Speaker 2:So, steve, let's get down to brass tacks. We've got an investor who wants to be 70% equity, 30% bonds at an overall asset allocation level. How do you, where do you? Do you put 70% into closed-end funds? Do you put 30% into closed-end funds and skip the fixed income Closed-end funds?
Speaker 1:are fixed. Closed-end funds are fixed income. There are in the universe I use for closed-end funds. There's over 110 fixed income, ie anything that has less than 35% in the stock market. In these closed-end funds I consider an income fund. Anything more than 35% in the stock market is my equity bucket, anything more than 35% in the stock market is my equity bucket and I have roughly 110 in the income and about 100 equity.
Speaker 1:Different closed-end funds and they're all different types, from short-term to intermediate to long-term, to higher quality to marginally lower quality, global. You know, in the muni bond you have all the different, like 12 different states that have individual state bonds and the regular ones that have everything. So, to diversify and yeah, I put it all in there because it's so much easier to you can trade them. It's not like an individual bond where, like you said, in 2020, you couldn't sell a municipal bond. I didn't have that problem. So yeah, I do. However, there are other income securities. There are REITs, which I used to do in the old days, and they are contained in many closed-end funds. There are BDCs same things contained in a few CEFs and several or many ETFs. There are CLOs contained in some CEFs and in ETFs, preferred stocks same thing both types. So for my larger, anybody with you know they got to have seven figures, million and a half or more.
Speaker 1:Yeah, you can go ahead and put a little bit into those ETFs that are in BDCs or CLOs and get away with it, recognize that they're more risky than the closed-end funds and so on. So, yeah, I use all the various types of securities, but I don't do them as individual entities anymore. I need the safety of the fund. You know the very principle that brought mutual funds into popularity, that allowed the average guy to participate in the growth of the economy without trying to select stocks, because it was all managed and done for him. The same thing that created that popularity is pretty much what I'm saying now. In the form of CEFs, I participate. I own 100 different equity closed-end funds with an average of over 200 positions in each. I own every stock you can imagine. I own the Magnificent Seven and my average cost per share is less than $20, and I own everything. I think that makes me feel very comfortable and confident that I'm participating in the economy totally without having to select the next winner or worry a bit.
Speaker 2:stuff like that Were you only bank seven, then what CEF would have that All?
Speaker 1:the CEFs, all the equity CEFs, have some of them in it. Some of those CEFs probably have all of them.
Speaker 3:Why would you need so many CEFs in your portfolio?
Speaker 1:There's two reasons. There's two reasons. As an advisor, when I was managing money for people, I told them that I would never, ever put them in any security that I didn't own myself.
Speaker 1:Fortunately, I had the assets that I could make that statement and hold true to it. So I wanted them to know I wasn't just selling them stuff that somebody suggested to me was good and that I wouldn't touch it myself. Same thing goes with when I switched over to closed-end funds and I had them all because I was diversified in all my portfolios. And when you start looking at multiple streams of income, I'm not looking for a big winner, I'm not looking to grow my market value, I want to grow my income. And the way I do that is with profit taking.
Speaker 1:And if you look at the, if you study the market, you know some years the healthcare industry is the hero, sometimes it's the oil industry, right now it's IA, you know. So it's always somebody that's going up and somebody that's going down. I always want to own something that's going up. So what I do with the closed-end funds is I own them all. I take profits on them rather quickly, faster than most people would Rather quickly, faster than most people would. I have an average. The average yield on my portfolios in the equity and income is a little less in the equity than the income, but roughly an average of 10% across the board. So when I look at one of my securities that thing is paying me three quarters of 1% a month.
Speaker 1:Okay, so if I find a lot somewhere where the lot itself is up one and a half percent, I say wait a minute, that's two months income. I just bought that thing five days ago and it's up, you know, and I can make two months income on it. I'll do it, you know. So if you manage your portfolio that way, you keep generating. That same capital can be reinvested again and again and again. Right environment, an environment simply where you go up three or four days in a row, you're going to have these profit-taking opportunities, even though the entire position isn't in the green. You have this other stream of income from the tax lots. This couldn't be done back in the 80s or the 90s or even even up through 2012, because you didn't have the technology.
Speaker 1:But today you open up fidelity, you can see everything that you've bought for you know yeah, do you um?
Speaker 3:do you keep a uh significant cash position or do you stay fully invested?
Speaker 1:I stay fully invested or except for, you know, right now I have a large sum of cash to pay my taxes, but you know. So out of each monthly distributions, if I have upcoming expenses, I'll set a sum aside. But I just have a reserve. I don't try to time the market at all because my yields are so high and some of the people in the community call it blizzards blizzards of money coming in at the end, first day and last day of the month from the distributions on all these things that you pretty much always have cash to take advantage of. Some things that go down, stuff like that.
Speaker 3:Do we need to worry at all about the leverage that's in this? I mean, how did these things do in 2008?
Speaker 1:They were fine. In fact, as we came out of that, we did even finer because interest rates went down. So these guys are managers. Leverage isn't something that's automatic. You know you make a decision. I can borrow money just like you would in your own life. You know I can borrow money at 2%. Why would I pay that $100,000 for a Mercedes if I can borrow this at 2% and buy that? Sucker you know, you know, that's the type of decision-making they make too.
Speaker 3:Do you study the managers as well?
Speaker 1:I study the providers, like if it's BlackRock or Nuveen or you know those types of names. I don't worry If I see a name that I'm not familiar with, like the first time I went with, let's say, doubleline. The first time I saw one of their closed-end funds, I'd studied it pretty carefully and looked around at all the past and everything, and I do that every month anyway with all of them. But yeah, there are about 45 financial institutions Most of them you'd know their names that produce closed-end funds. The biggest names are Nuveen and BlackRock and PIMCO, and PIMCO.
Speaker 2:So when you look at these the cross-ownership of the same closed-end funds in Nuveen Fund 1 and BlackRock Fund 2, does it bother you? Do you ever aggregate across the different funds to determine what is your biggest closed-end fund that's held by?
Speaker 1:these your biggest closed-end fund, that's held by these?
Speaker 2:Do you aggregate all of the underlying holdings and get a perspective of your?
Speaker 1:overall holding, absolutely. Did you see that symbol that was up before my face came up on the screen, that pyramid, yeah, the pyramid You're familiar with the risk pyramid.
Speaker 2:Yeah, a little bit.
Speaker 1:Okay, so there are about 40 different types, 42, 43 different types of closed-end funds that we've identified and we've segregated that into eight floors of a pyramid, and the four bottom floors are the fixed income investments, with government and, and you know, state municipal bonds on the bottom, so to speak, and then the first equities appear on the fifth floor. On the fifth floor and then way up there on the top floor are things like REITs, not REITs, MLPs and things like that, not REITs. Okay, is that? I prepare for the people in my community. Every security has the risk pyramid level associated with it, so they can actually by numbers determine.
Speaker 2:You know, they know that all their bonds are less risky than all their stocks, so even a bond fund that might be using leverage. All of the municipal bond funds use leverage. Leverages there must be some that use more than others.
Speaker 1:The maximum allowed is 50%. Okay, the average usage is less than 30%, which is like I said before. I think when we were talking earlier, that 30% is less than your average company on the New York Stock Exchange.
Speaker 2:So how would a muni bond that's using 50% leverage compare to an equity closed-end fund that's using 20.
Speaker 1:In what way? In risk.
Speaker 2:It's much less risk when you just spend the first four levels of fixed income and then you put the equities on top Right. I just told you a muni bond is a 50% Right. So you're saying that one of the equity guys can move down into the four bottom layers.
Speaker 1:No, no, they can't. Equities are always more. Stocks are always more risky than bonds when a company goes bankrupt who gets paid out?
Speaker 2:I just asked you when you said that the muni bond was riskier, didn't you? No, no, no, never. The muni bond was riskier, didn't it? No, no, no, never. So they're using 50% leverage and they're less risk than the equity guy who's using 20% leverage.
Speaker 1:Yes, less financial risk. We're not talking about market value risk, we're talking about financial risk. The risk of total loss of your money is always greater in an equity position than it is in a bond position, always when a company goes under.
Speaker 2:A yield bond is going to be less risky or more risky than an equity that has low leverage in a closed-end fund. Less risky.
Speaker 1:A bond is always less risky than the same company's stock.
Speaker 2:It's higher up on the capital structure, it's higher up on the capital structure, I know, but if the capital structure of a company is poor, and they're borrowing more than they should then they could be more risky than the bond that you're saying has a better capital structure but a worse company.
Speaker 1:If the company goes out of business, it has to pay the bondholders first, even if they are high-yield bonds. And they can't even pay another dividend to their shareholders until they pay the interest.
Speaker 2:I'm not asking you within the same security, oh okay, no, and across different securities. Okay, yes, so that's what I'm saying your pyramid, that middle level of your pyramid, I'm not sure how you go from the lowest risk equity to the highest risk equity fixed income, when in reality you could have-.
Speaker 1:There are one or two closed-end funds high yield global. That would be up there with the bottom tier of the equities. So yeah there may be two or three that infiltrate up. Just like when I use ETFs, I consider them all riskier, but there are ETFs that just invest in closed-end funds, so they're lower in risk to me.
Speaker 3:But yes, I see your point.
Speaker 1:You're absolutely right. A high-yield global CEF would be more risky, probably, than the stock of a company like Exxon.
Speaker 2:Yeah, I'm just saying there are cases where people manage their equity so conservatively to generate income selling call options, and so I pursued with people who wanted to own some of these things and ETFs, and then I would write calls against those ETFs, and so one of the things we did was, you know, at one time J&J call options had a volatility of 8%. Now the overall risk of the market is 15. And how do you get a corporate that has that lower risk Because their balance sheet quality is still AAA.
Speaker 1:So good yeah.
Speaker 2:Right, and so all I'm saying is there can be cases where equities will present as having less risk, and I guess I'm just trying to understand where they're going. Well, the highest Things don't all. I love charts that say everything fits in this diagram, and then you say well, there's some uncertainty between this level and this level.
Speaker 1:I absolutely agree. I didn't mean to make it say that it's an absolute. There are no absolutes, you're right, I totally agree with you. But the thing that is most interesting is that when you have this broad diversification that I encourage you know I'm talking mainly to six-figure investors and so on that I encourage investors to own them all is because there always seems to be something that you can take a profit on when you own that diverse portfolio, be it equity or fixed income.
Speaker 2:Yeah, I mean I like the fact that you're constantly monitoring and trying to take advantage of some of those moves. I like the fact that you're trying to look at the right managers to make sure they're assembling good holdings underneath it. I like your approach, steve. I think it's worth considering. I guess the place that I have the problem is can I go 100% with an account in this, and I agree that you're going to pretty extensive diversification. I see the benefit of having a 10% yield. I guess I'm trying to determine what's your overall return for the last 10 years or the last 20 years or some, for a strategy like this.
Speaker 1:Well, a strategy like this has grown the working capital every quarter, every year. Working capital, which means the amount you have invested in your portfolio and the income it produces, are growing every year. My projected 12-month income is growing every quarter, every year. Now the market value is going to vary. Interest rates go up. The market value is going to vary. Interest rates go up, my market value is going down. There's no doubt about it. The stock market may still be going up. The stock market is going up and interest rates are stable or going down. I'm going to be at an all time market value high too, but I'm not going to have exponential gains in return because I'm clipping my profits and investing in things that are down.
Speaker 1:I'm happy seeing more red on my statement than green, and particularly in the environment we've had this year, for example, with the relatively smooth cross pattern. We haven't had huge. We have one significant down, but no real huge ups. I mean the Dow hitting that all-time high the other day, on August 22nd and 28th. Those are the only two all-times highs it's hit all year. Right now, today, it's around where it was last December, last November. So we're in a rally that's been pushed by the Magnificent Seven in my mind, and certainly not by the overall. The Russell is a good indicator, in a sense, of the overall economy because it's so many companies and they're all small cap. It's where it was five years ago, you know. So we're in a rally that's been fueled pretty much by AI.
Speaker 2:Yeah, all right, I'd like to give everybody a last chance to have any comments or questions.
Speaker 3:I don't have any. I would just say, steve, that I thought this was a fantastic discussion and I believe we should try to have you back to discuss even more.
Speaker 1:That'd be great. I'd like that. Maybe we can look at some numbers the next time.
Speaker 2:Yeah, yeah, I mean, do you want to say anything to our investors, like we're trying to improve the investment IQ of people who listen, do you? Have any suggestions in terms of.
Speaker 1:Oh no, any suggestions in terms of oh no. I think it's great the way you discussed and and get into it, get into the you know the nitty-gritty with your, with your guests. I think that's fine, I think. I think you pointed out to me how I expressed something created an assumption that I really didn't want to create. It was just categorization. It wasn wasn't a distinctive. You know everyone suits that, but that was great. But yeah, I think people should give the income-focused approach a look, because there are many within ETFs and CEFs just a small number of ETFs, a large number of CEFs. There are ways to generate significant income, particularly with a retirement portfolio. That isn't being suggested to you by most advisory firms.
Speaker 2:I think you made a lot of good points. I like the use of some of these strategies. I believe that income from bonds is not risk-free. We need to understand that. We need to understand that the US government and how they manage their own balance sheet can create risk, just like any other business can create risk with too much debt. So I agree with a lot of your premises and I like the fact that I don't like to have a duration that's too long, and so if my income came from some of these vehicles, I think they would be additive to the overall risk and return spectrum for our clients. I appreciate it. I agree they would be Okay.
Speaker 2:Thanks for joining us and I appreciate any. Let's try to do it again soon. All Skeptics, investors, please check out Steve and some of his ideas. We're going to have a link on our transcripts that you can look at some of the stuff, and I think it's worthwhile to always think outside the box, because the box the market participants, particularly the street, puts you in sometimes isn't the right box. So thanks everybody. Have a great day.
