Grantham GMO Q1 2016 Quarterly Letter Highlights

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Here are my notes and takeaways from the GMO Quarterly Letter for Q1 2016, released May 10th, 2016. I always pick up something educational when reading these letters (previous editions may require free registration.) I already discussed their Q1 2016 Asset Class Forecasts with the previous Q4 2015 letter, but in the future I’ll try to align the same quarterly information into one post.

GMO investment philosophy is that asset prices will eventually mean-revert back to their historical valuation levels. However, “eventually” can mean prices moving in the opposite way for a very long time periods. Right now is one of those periods:

It’s no secret that the last half decade has been a rough one for value-based asset allocation. With central bankers pushing interest rates down to unimagined lows, ongoing disappointment from the emerging markets that have looked cheaper than the rest of the world, and the continuing outperformance from the U.S. stock market and growth stocks generally…

Of course, such deviations are exactly the source of potential excess returns for such value investors. GMO still believes in long-term value-based asset allocation.

A quick primer on how future returns work for bonds. Excerpt:

It is universally understood (I hope) that a 10-year Treasury note yielding 1.84% held for 10 years will give a return pretty close to 1.84%. It is not quite so widely known that the rate of return of a dynamic portfolio of such bonds – a “constant maturity strategy” – is also pretty well fixed for certain time horizons.

To take the Barclays U.S. Aggregate Bond index (Agg) as an example of a dynamic portfolio, with a duration of a little over five years and a current yield of 2.17%, the range of possible returns over the next seven years is not very wide. We are not guaranteed to get 2.17%, but the return if the yield were to gradually drop to zero over that period would be about 2.9% per year, and if the yield were to gradually double, it would be about 1.5% per year. No matter what happens to yields over the next seven years, returns are going to be something pretty close to 2.17% on the Agg.

Wrong prediction on oil prices. In 2005, Grantham made a rough 10-year prediction that rising oil prices were not in a bubble, but instead actually a “paradigm shift” where oil prices would stay high permanently. He also predicted that we would start to run out of other finite resources, resulting in higher commodities prices. As it turns out, we saw that oil prices have crashed along with other commodities. Grantham outlines again why he made the prediction, what he got wrong, and of course goes ahead and makes another set of predictions:

– Oil stocks should do well over the next five years, perhaps regaining much of their losses. But, after 5 years, prospects are more questionable, and, beyond 10 years, much worse.

– Mineral resource stocks are unlikely to regain their losses, but from current very low prices they will probably outperform based on historical parallels following similar major crashes.

– Farmland is likely to outperform most other assets. It is still my first choice for long- term investing.

– Forestry should perform above aggregate portfolio averages and be less volatile than equities.

Why should we listen to this new forecast when his last one was wrong? It all goes back to the first point of the letter. These are all long-term calls based on history and a bit of common sense. Grantham is telling you to buy exposure into finite resources – oil, minerals, farmland, and timber. Sooner or later, if you have something that everyone needs like oil and is also selling at historically very low prices, prices are going to go back up eventually.

The problem is “eventually” could be this year, or it could be another 10 years or more.

High US housing prices are more worrying than high US stock market prices. Housing prices are certainly bouncing back…

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…the threshold for a bubble level for the U.S. market is about 2300 on the S&P 500, about 10% above current levels…

… Thus, unlikely as it may sound, in 12 to 24 months U.S. house prices – much more dangerous than inflated stock prices in my opinion – might beat the U.S. equity market in the race to cause the next financial crisis.

Climate change warning.

Let me just make the point here that those who still think climate problems are off topic and not a major economic and financial issue are dead wrong. Dealing with the increasing damage from climate extremes and, just as important, the growing economic potential in activities to overcome it will increasingly dominate entrepreneurial efforts in future decades. As investors we should try to be prepared for this.

You read this letter for Grantham’s opinions, and you definitely get them. Personally, I don’t see anything that would change my boring portfolio. If anything, I would make sure to have some international exposure to emerging markets stocks as they have low historical valuations and are also correlated with commodities.

Stash App Review: Simplified Investing on Your Smartphone

stash1Updated: Android app now available, new $5 offer for new client sign-ups. Got five bucks, a smartphone, and a bank account? You’re just a few taps from investing and owning a piece of hundreds of businesses.

Stash is a new smartphone app with a real brokerage account underneath that lets you invest in a curated selection of roughly 30 different ETFs. You can start with as little as $5 and add more in any increment via fractional share ownership. The app interface is nice and shiny, but I took some time to look under the hood a bit.

What do you need to sign up?

  • Download the app. Now available on both iOS and Android.
  • Your personal information (name, address, SSN), same as with all SIPC-insured brokerage accounts.
  • Fill out a short risk questionnaire to help guide towards an appropriate investment.
  • Pick your investment, which you can change later. See below for details.
  • Fund with any bank account. Verification can be done via two small test deposits. For selected banks, you can expedite the linking process by using your bank login credentials instead.

Portfolio details. You can choose from about 30 different “investments”, which are really just re-labelled exchange-traded funds (ETFs) that anyone can buy with any brokerage account. The idea is to make things more approachable and not to scare you away with things like ticker symbols, limit orders, and so on. Here are some pairings of their investment names and the underlying ETF.

  • Aggressive Mix – iShares Core Growth Allocation ETF (ticker AOR)
  • Moderate Mix – iShares Core Moderate Allocation (AOM)
  • Blue Chips – Vanguard Mega Cap ETF (MGC)
  • Park my Cash – PIMCO Enhanced Short Maturity Active ETF (MINT)
  • Roll with Buffett – Berkshire Hathaway Inc. Class B Shares (BRK.B)
  • Slow & Steady – PowerShares S&P 500 Low Volatility ETF (SPLV)
  • Home Sweet Home – SPDR S&P Homebuilders ETF (XHB)
  • Clean & Green – iShares Global Clean Energy ETFm (ICLN)
  • Global Citizen – Vanguard Total World Stock ETF (VT)
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Based on a risk questionnaire, you will be identified as either a Conservative, Moderate or Aggressive investor. Some of the options, like the Aggressive Mix / iShares Core Growth Allocation ETF are essentially a old-fashioned balanced fund with 60% stocks and 40% bonds. (Moderate Mix is only 40% stocks and 60% bonds.) Others, like just buying shares of Berkshire Hathaway (BRK), are more focused and potentially volatile. You will only be shown options that are below or at your designated risk level.

I personally like Global Citizen – Vanguard Total World Stock ETF (VT) as you basically own a slice of all of the world’s largest businesses. Warren Buffett fans may enjoy an easy way to build up a Berkshire position in $5 increments.

Fractional shares are used. That means you can invest odd numbers like $7 or $217 and still have it fully invested in something that costs $100 a share. Based on their FAQ, dividends are not automatically reinvested. Dividends are deposited as cash and will stay there until you decided to invest it.

You cannot invest in individual stocks (unless they happen to be listed an investment).

Fees. Free for the first 3 months. After that, $1 per month for balances below $5,000. Once you reach $5,000, it switches over to 0.25% of your balance per year. (Example. $10,000 x 0.25% = $25 per year.) Fees are taken from your bank account, not from your Stash investment portfolio. Stash does not charge monthly subscription fees if your account balance is $0.

Each underlying ETF has their own embedded expense ratio. No commission fee for stock trades. No fee for deposits or withdrawals via electronic bank transfer.

I installed the app and started the account opening process, but didn’t actually open account. I usually would, but with all these new robo-brokers I’ve been getting a flood of 1099-B forms with lots of tiny little tax lots. That gets tiresome at tax filing time.

This and that. After reading through their FAQs and disclosures, here are other notable items:

  • You can only link one bank account at a time to Stash. If you wish to make a change, you must e-mail them at support@stashinvest.com.
  • Online statements are free. Paper statements are $5 each.
  • You may only deposit up to $10,000 per day via online bank transfer. You cannot deposit physical checks.
  • you may only withdraw up to $10,000 per day via online bank transfer. You cannot request a withdrawals via physical check.
  • Stash uses Apex Clearing as their custodian firm. Many other similar brokerage sites use Apex.

Final thoughts. I may be too old to be a Millennial, but I can still appreciate the power of a good smartphone app. I will even counter the people that point out that $1 a month on even a $600 balance is a 2% management fee. Yes, 2% would be a lot of money a $500,000 portfolio. But $1 is also how much people pay for a song or silly game. The more important question is – will this app start a habit of saving and investing? I don’t know, but this BuzzFeed article describes how Stash used focus groups to suggest their “make-things-not-so-scary” approach will get newbie investors over the hump. It’s hard to get less scary than just $5 a week.

Perhaps nearly as important – Stash already has some serious competition. The Robinhood app also has a nice user interface on top of a traditional brokerage account (no fractional shares) that lets you trade any stock with no commissions (with no simplification or investment guidance). The “invest in your interests” idea and fractional share ownership is also available at Motif Investing. The Acorns app adds a behavioral trick where it rounds up your daily purchases and sweeps the “spare change” over automatically.

Stash reached out to me and if you click through this special link, Stash will give new clients $5 to make an investment of your choice.

Free 1,000 United Miles with Prosper Daily App (Expired)

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Research Affiliates 10-Year Asset Class Forecast, Q1 2016

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Distribution of Lifetime Returns for Individual US Stocks, 1989-2015

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LendingClub Drama: Should Investor-Lenders Be Scared of Bankruptcy?

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Digit Review: “You Won’t Even Notice” Automated Savings Account

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Qapital App Review: Rules-Based Automated Savings Account – Free $5 to Start

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Do What You Love – If You Can Work For Yourself

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Starbucks $20 Gift Card for $10 with Visa Checkout

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Sam’s Club Mom’s and Dad’s Club – Free $10 eGift Card

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Sam's Club has a new Mom's and Dad's Club and is giving out free $10 eGift cards to join. Looks like you'll get special offers and free samples targeted for families and children. Fast sign-up, eGift card must be used online. You must use the … [Read the rest]