Investing Archives - Lazy Man and Money

What’s in My Lazy Portfolio?

March 24, 2021 by Lazy Man 5 Comments

Usually a “lazy portfolio” refers to investing in two or three well-diversified index funds. You can be very diversified if you invested in VTI (Vanguard Total Market), VEU (Vanguard Ex-US), and BND (Vanguard Total Bond Market). You could divide it up 30-30-40 and never touch it again (though you should continue to try to add new money to the investment). Historically, that’s been a very safe and profitable strategy.

However, since I’m Lazy Man, my “Lazy Portfolio” is a little different. It’s actually not so lazy at all. I enjoying picking satellite stocks. So while I may recommend people go with the traditional lazy portfolio because it’s easy, I don’t take my own advice.

I think it’s always interesting when a personal finance writer says one thing, and then does something different. In my case, I do something different for three reasons:

1. I’m doing well with my satellite stocks. Here’s what my actively managed portfolio performance looks like:

2. I don’t have many hobbies, but one of them is following the markets and seeing if I can make a percentage extra or two.

3. I have significant protection with my core holdings. I’m only managing retirement money, so I don’t have to worry about tax consequences. My wife has more retirement money in her government TSP which has a lazy portfolio allocation. She has a government pension providing long-term income security. We have investment properties that can provide us with income in the future. The satellite stocks in general make up a small amount of our overall portfolio.

Today, I thought I’d pull back the curtain and explain what my investments are and how they got that way. I think you’ll find that it is far from a perfect portfolio.

What’s in My Lazy Portfolio?

This mess of stocks and ETF doesn’t make much sense at the first glance. I have a lot of explaining to do. So here goes:

Vanguard Emerging Markets ETF (VWO)

The only reason why I have more in emerging markets than VEU (see below) is that it has performed worse and I feel there’s more opportunity for growth in those markets in the long-term. This is a long-term position, so I’m not too worried about COVID hitting those countries hard, right now.

Vanguard FTSE All World ex US ETF (VEU)

This holding makes up another large chunk of my international stock holdings. These first two holdings are 24% of my portfolio. With some of the stocks below, my international holdings are around 30% overall.

Vanguard Total Bond Market ETF (BND)

Whenever market indicators point towards a stock market crash, I increase the amount of money I have in bonds. I usually keep less than 5% of my portfolio in this, because I’ve got time and other safety nets. However, I’ve been selling off the indexes as they reach new highs and adding more bonds.

I did this strategy in early 2020 and when the markets crashed with COVID, I was able to sell bonds (which didn’t drop as much) and buy stocks at nearly half the price they are today. I know that I can’t call the bottom, so every time the stock market dropped about 10%, I would sell another 2% of bonds and buy-in.

Twitter (TWTR)

I invested in Twitter a long time ago, with most of the shares around $15. I sold some at $40, $45, $50, $60, and $75. Even though I keep selling shares, the overall value has grown, so it’s still a large percentage of my portfolio. Perhaps I should have sold off more, but I think it’s still undervalued.

iShares Core High Dividend ETF (HDV)

This forms part of my core United States index holdings. I like high dividend ETFs for three reasons:

1. They produce solid income. HDV has about a 3% yield right now.
2. They are typically more boring companies that earn good cash and profits which I feel protects me in most market crashes.
3. They help me remove tech risk from my portfolio. As you’ll see with this list of stocks, I’ve got a lot of technology and the market indexes have plenty of tech at the top as well.

Invesco Solar ETF (TAN)

I bought this years ago when I got solar panels on my house. The last year has seen solar stocks skyrocket. I could have sold some off and redistributed the money across broader indexes, but I don’t mind holding solar stocks for another 20, 30, or 40 years (if I’m still around that long).

Vanguard Small-Cap Index Fund ETF (VB)

Most of the big indexes (VTI, I’m looking at you) strongly favor big companies. However, over the long haul, smaller companies tend to perform better. This is a way to give me a little more diversity and better performance than if I had just bought VTI alone. My overall US stocks are still mostly large-cap, so an argument could be made that I should increase this allocation.

Alphabet Class C (GOOG) and Alphabet Class A (GOOGL)

I bought Google a long time ago and it split into two voter classes. These never differ by much and it’s about 9.5% of my portfolio which would bump it up the list towards the top.

I decided not to touch it and it has performed well. Investing in Google is almost like investing in the entire internet and smartphone markets. It almost feels like its own index fund.

Vanguard Total Stock Market Index Fund ETF (VTI)

Finally, the staple of most lazy portfolios shows up. I used to have a lot more in this, but I sold a lot and put in HDV (see above). If you were to combine my VTI, HDV, and VB holdings, that’s 17% of my portfolio in US indexes.

Snap Inc (SNAP)

I bought at lot SNAP at under $10. Much like Twitter, even though sold off more than half, it is still a significant holding. Whenever SNAP and Twitter reach new highs, I sell off about 5% or 10%. At this point, I’m playing with the house’s money.

United States Oil Fund LP (USO)

I had been buying this oil ETF for far too long. I lost a ton of money when COVID hit and the price of oil went negative. However, I continued to dollar cost average into it. About a month ago, I sold off half since it I was finally solidly in the profitable area. I am holding to the rest with the idea that vaccines will spur a lot of pent-up demand for travel.

Over the long-term, I’d rather not invest in the oil industry.

Apple Inc (AAPL)

I bought some of these several years ago and sold off enough to just play with the house’s money. It’s split once or twice as the company became the first in the US to hit 1T and 2T in market cap.

There’s really no need for me to keep this since it’s well represented in the indexes. It feels like a safe holding though.

IBM (IBM)

I bought this because I thought that Watson would revolutionize the world. It didn’t happen, but IBM has paid out 5% dividends (or more) for years that I’ve held it. In theory, if I put my entirely portfolio in this stock, I could live off the dividends as it would be higher than the 4% rule

General Electric (GE)

I bought this years ago because I thought it was cheap after it had followed it a lot. Then it fell more and more. I bought more and more, dollar cost averaging in, and I’m up about 30% at this point. I have sold some since I’m up. I would sell more, but the pandemic hit their businesses harder than many companies. I’m hopeful that when things fully open up, this stock will out-perform.

Vanguard Real Estate Index Fund ETF (VNQ)

I like to diversify with some real estate holdings. This pays a decent dividend of 3.88% as well.

iShares MSCI Frontier and Select EM ETF (FM)

Yes, 1.5% of my money is in frontier markets. These are countries like Kuwait, Vietnam, Morocco, Kenya, Romania, and Nigeria.

It has not performed well. I’m down about 5.71%. This is a very, very long-term growth investment. It also diversifies my holdings so that I’m invested in probably 100 countries.

Alibaba (BABA)

There was one day (around 2015 or so) when the stock market dropped a bunch for just about 10 minutes. I had a little liquid money and saw that Alibaba dropped more than most. I don’t mind having 1% of my money in “the Amazon of China.”

Lyft Inc (LYFT)

When Lyft dropped to being worth about $8 billion dollars I thought that Google (or another company work on self-driving technology) might acquire it. That didn’t happen, but Lyft’s stock has jumped a lot. I’m not sure how ride-sharing will be profitable as it is now, so I’ve been selling off shares to protect myself if it should drop to $0.

Altria Group (MO)

I was in a forum a couple of months ago and nearly everyone said this was the best dividend investment paying around 8.5%. They had some good news in the last earnings and I’m up 25%. It’s better to be lucky than good sometimes I guess.

I’m very morally conflicted about investing in cigarettes and will probably sell this off soon.

Pinterest Inc (PINS)

This was another case of being lucky. I saw it get down to about $18 a share and thought that it was much less than the IPO, so let’s invest a little. It has been up nearly 500%, so I sold off some to play with the house’s money. (If you hadn’t noticed, this is something I do a lot.)

Kraft Heinz Co (KHC)

Warren Buffett gave up on the company, so I jumped in at a share price lower than him. It has a dividend yield of 4% and my cost basis is about $22 a share (it’s trading at $39). I have been happy with the returns for a couple of years.

Ford Motor Company (F)

I bought Ford because it was paying a 12% dividend due to the COVID-19 impact on its stock price. Ford needed to keep the money to run operations and decided to eliminate the dividend. What could have been a disaster has turned into a blessing, the stock is up 80% from where I bought it.

AT&T Inc. (T)

I bought this about a year ago for its 7.5% dividend yield. I felt like people would still need their cell phones and cable service in a pandemic. It also looks like HBO Max is a good streaming service. The stock itself is up 7%, so with the yield, it is looking good.

Under Armour Inc Class C (UA)

I bought a few shares at around $6.50 when it was looking like a disaster. It’s around $19 now. I sold a little to play with the house’s money once again. It used to be a $20 billion-dollar company, so maybe there’s still room for it to grow.

Carnival Corp (CCL), Norwegian Cruise Line Holdings Ltd (NCLH), Royal Caribbean Cruises Ltd (RCL)

I bought a little of each of the three major cruise lines when they tank due to COVID. At the time it was less than half of a percent of my portfolio. I just wasn’t sure the entire industry would go away forever. Now they are a little over 1% of my portfolio. I’ve been selling some of them off at highs and it’s close to playing with the house’s money.

Boeing Co (BA)

Similar to the cruise lines, I bought in at $109 as it was a bargain from its $300+ highs. I was counting on COVID getting solved at some point and them being able to figure out their plane troubles. I sold some to play with the house’s money or this would be a bigger percentage.

Uber Technologies Inc (UBER)

Uber seems to lose billions of dollars a year. Still, I thought that at a $50 billion market cap, it had significant assets and would be acquired if nothing else. Guess what? Sold some for house’s money sake again.

Cash – Cash – Cash! (Cash)

I don’t like to keep a lot of cash around. I’ve been putting most of it into BND, so I can at least earn some income on the dividends.

Lazy Man’s Portfolio Recap

So that’s the rundown of how I invested my money. As you can tell, things got a little messy in some places and I got lucky in other places. The overall trend right now is to try to sell some of the individual holdings at highs and invest them in index funds.

I would also be willing to invest in new satellite stocks, but I haven’t found anything that’s a good value recently. Most of the companies that seem cheap to me (AT&T for example) aren’t likely to grow much. That’s another reason why I am content to keep the money invested in a place in bonds or dividend stocks while I wait to find a new opportunity.

Three Attractive High-Yield Dividend Stocks For 2021

March 8, 2021 by Lazy Man 5 Comments

Today, I am rushing to get 2020 taxes filed in hopes of getting the next stimulus check. We had a one-time business event in 2019 that put us out of the range. In 2020, with a loss of some income due to COVID, we’ll probably qualify. If we can get our 2020 taxes to the tax preparer today, we may get them filed in time. If you are in a similar situation, I hope you are getting your taxes in quickly too.

Nate Parsh at Sure Dividend was kind enough to fill in with one of my favorite topics of late – high-yield dividend stocks. At the end of the article, I explain why I like them so much lately.

With the 10-year treasury bond and the S&P 500 both yielding approximately 1.5%, investors looking for income may feel that their investment choices are limited.

One way to produce more income would be to seek out higher-yielding investments. However, this is not without risk, as a high yield could be a sign of a company facing significant challenges. Income investors should be wary of the highest-yielding stocks, as a dividend cut could be forthcoming. Still, there are many high dividend stocks that offer a very safe dividend.

The following 3 dividend stocks have yields significantly above the market average, along with the potential for future dividend growth.

AT&T Inc.

AT&T Inc. (NYSE: T) can trace its roots back to the late-1800’s and Alexander Graham Bell. Today, the company is the largest communication company in the world. AT&T has a market capitalization in excess of $200 billion and generated almost $172 billion of revenue in 2020.

AT&T’s business did face some COVID-19 headwinds last year, particularly in the company’s WarnerMedia and domestic wireless services business. Overall, revenue declined 5% while adjusted earnings-per-share decreased 11%. AT&T stated that the pandemic reduced adjusted earnings-per-share by $0.43 during the year. That said, the company does expect both top and bottom-lines to grow ~1% in 2021 as business stabilizes.

AT&T has loaded up its balance sheet over the past few years thanks to a number of high-profile acquisitions, including the company’s purchase of DirectTV in 2015 for $48.5 billion ($67 billion when including debt) and its $85.4 billion purchase of Time Warner in 2018. Total debt reached a high of nearly $170 billion in 2018 as a result.

To its credit, AT&T has worked diligently to reduce its debt obligations over the past few years by divesting non-core assets, including selling its stake in Hulu in 2019. More recently, the company has announced that it will be selling a minority interest in DirecTV to a private equity firm. Originally, the company was looking to sell the entire business.

The company used proceeds from the sale of its stake in Hulu (~$1.8 billion) to pay down debt. AT&T has pledged to do the same with the nearly $8 billion it will receive in the DirecTV transaction. While debt remains high (approximately $152 billion as of the end of 2020), the coverage ratio has improved slightly and AT&T has a targeted cover ratio of 2.0 to 2.5x by 2022 down from 2.8x just two years prior.

Even with the recent difficulty, we believe AT&T an attractive option for income investors as the company produces robust levels of free cash flow every year. For example, the company generated $27.5 billion of free cash flow last year and expects to produce a similar amount in 2021. Just 61% of free cash flow last year was distributed in the form of dividends.

Shares offer a 7.4% dividend yield and the company has raised its dividend for 36 consecutive years, which makes it a member of the Dividend Aristocrat index. With a projected earnings payout ratio of 65% for the current year, the sheer size of the company’s free cash flow, and the ongoing reduction in debt, it is likely that AT&T’s high dividend yield is very safe from a potential cut.

International Business Machines Corporation

International Business Machines Corporation (IBM) provides integrated enterprise solutions for software, hardware, and services. The company typically provides end-to-end solutions for its customers, making IBM a one-stop shop for its clients. IBM has a market capitalization of $108 billion and produced revenue of almost $74 billion last year.

Somewhat famously, IBM has reported declining revenues for several years in a row. This continued in 2020 as sales fell 6.5% and 4.6% for the fourth quarter and full year, respectively.

The demand for cloud-related product offerings has surged over the past few years and IBM has been slow to react to the sea change. IBM has tried to gain more of a foothold in this space by acquiring Red Hat for $34 billion in 2019.

Under the direction of new CEO Arvind Krishna, IBM will be splitting into two companies. The new IBM will contain the Hybrid Cloud and AI business with a focus on software. The second company, which is yet to be named, will focus on Managed Infrastructure Services. This is a good move in our opinion as the growth rates for the cloud business will likely be higher than the legacy business.

IBM is clearly behind other cloud giants, but this is a sector that is expected to grow at a high double-digit percentage over just the next five years. Focusing an entire company on cloud computing should pay off for the new IBM.

While IBM’s business has been rather poor over the last decade, it has still provided a strong dividend yield. The company has now increased its dividend for the past 25 years, which has gained the company membership among the Dividend Aristocrats. Dividend growth has been solid, with a compound annual growth rate of 8.4% over the last decade.

The dividend appears to be well protected as well. The company distributed just 39% of its $15 billion of free cash flow in the form of dividends last year. IBM’s projected earnings payout ratio is 59% for 2021, down from 75% last year.

With a 5.3% yield, shareholders are being paid generously to wait for the company to find its place in the cloud computing space.

Ford Motor Company

Ford Motor Company (F) was incorporated in 1903 and, over the last 118 years, has transformed into one of the world’s largest automakers. The company provides a popular assortment of cars, trucks, and SUVs. Ford is valued at just under $50 billion and generated revenues of $116 billion in 2020.

Ford may seem like an odd addition to a list of attractive dividend-paying stocks since the company paused its dividend in the midst of dealing with COVID-19. That being said, the stock offered a high yield for quite some time leading up to the pandemic. Shares averaged a dividend yield of 5.2% from 2015 through 2019, showing that Ford was no stranger to paying a high yield.

The company needed all available capital to make it through the worst parts of the pandemic and prudently paused its dividend.

Leadership did not mention what conditions would need to occur for the dividend to be reinstated, but we believe that a recovery from the COVID-19 pandemic will eventually take place. With the start of the vaccine rollout and additional stimulus from governments around the world, we feel that Ford could be in a prime position to return to pre-pandemic growth once COVID-19 is dealt with.

Even under difficult circumstances, Ford still had free cash flow of $18.5 billion in 2020. In 2019, the last year the company paid each of its quarterly dividends, the free cash flow payout ratio was a very reasonable 40%.

While Ford likely faces headwinds in the near term due to the unknown duration of COVID-19, there appears to be a possibility that the company could reinstate its dividend at some point. Given Ford’s history and free cash flow, it is likely that the yield could be quite generous for shareholders willing to take a long-term view of the company.

Final thoughts

Income investors are limited on their investment options in today’s market. This class of investors also has to be careful in reaching for yield. AT&T and IBM are two companies that have short-term challenges, but pay a generous and well-covered dividend. For investors with more risk appetite, Ford could also offer a high yield following a recovery from the pandemic.

Disclosure: The author (Nate Parsh) is long T
Disclosure: The publisher (Lazy Man and Money) is long all three stocks (T, IBM, and Ford)

Publisher’s Thoughts

With the disclosure above, you may notice that I invest in all the above companies. I had given Nate some ideas to look into for the article. Before Ford paused its dividend, it was paying out around a 12% yield as the market crashed with COVID. I decided to hold on, even with the paused dividend, and the stock is up nearly 100% from where I bought it at. If they resume dividends it could have a high yield on cost.

I’ve become more of a fan of high-yield dividend stocks over the last few years because the interest rates from other investments have been low. There may be more risk in these individual companies, but I think it is worth it.

Invest in Sports Players?

February 24, 2021 by Lazy Man 1 Comment

There are a number of alternative investments out there. For example, you can invest in art. Back in 2008, I wrote about a company called Beauty Holding that let you invest in models. It doesn’t look like that company is around any more, so it may not have been a great investment after all.

Investing in people’s future income is an idea that has always intrigued me. A friend of mine’s father is a doctor and he used to say that he’d pay all of medical school if he could take the 9th and 10th year of earnings for a doctor. I remember him saying this around 2000, I’m not sure if the math still works out today.

However, what if we took that same concept and applied it to professional athletes (or those striving to become professional athletes)? Today I wanted to take a look at three cases where that has been somewhat possible. By coincidence, all three are baseball players. Each player’s history gives us a unique angle into how these kinds of investments can work.

Investing in Baseball Players

There is at least one place where you can personally invest in professional athletes. I don’t know how legit that place, (I only saw one athlete available), so I’m not going to include it here. More typically, some companies that already have big money are investing it hoping to strike it rich by getting a percentage of a star athlete’s future earnings.

Imagine if you had a time machine and went back to 2000 and bought 5% of Tom Brady’s future earnings. He probably wouldn’t have been selling them, but one can imagine that an investment of a few hundred thousand dollars would be worth $20 million dollars today.

Case 1: Fernando Tatis Jr.

Let’s start with the most recent case in the news. Fernando Tatis Jr. made headlines by signing a contract for $340 million dollars over 14-years. It’s one of the biggest deals in major league history.

However, when Fernando Tatis was a minor leaguer, he made a deal with Big League Advance. Big League Advance gives players around $50,000 for every 1% of their future earnings. If Tatis took the maximum money available in such a deal ($500,000) Big League Advance would $34 million dollars over the next 14 years of Tatis’ contract.

It may sound to some like Tatis got taken advantage of. However, few players make this kind of money. The salary in the minor leagues is very low. A guaranteed $500,000 at a young age could make him financially independent if he got injured and never made it to the majors. There’s another thing to note, we don’t know the exact specifics of Tatis’ particular deal. It’s possible he could have negotiated for twice the money and only gave up 3% of his future earnings.

From the perspective of Big League Advance, they are little different than a Silicon Valley incubator funding a start-up in hopes of a big payday down the line. In fact, Tatis said he used the money to optimize nutrition, hire better trainers, and create a better practice environment.

This is fine for Big League Advance, but it doesn’t help the average person, you or me, to invest in a professional athlete. Maybe someday they’ll become a publicly-traded company or resell shares of earnings. That would be similar to the Masterworks art investment model.

Case 2a: Andrew Heaney (2015)

This case study was written for this blog by frequent contributor, Kosmo back in 2015.

Andrew Heaney, a pitcher for the Angels, recently became the latest athlete to sell a chunk of his future earnings to FanTex. FanTex is paying Heaney $3.34 million in exchange for 10% of Heaney’s future baseball-related income.

Why would Heaney do this? He’s a Major League Baseball player, so surely he’s already unimaginably wealthy, right?

Heaney actually is better off than most players with his amount of Major League service time. When he was drafted (in the first round of the draft), he signed for a $2.6 million signing bonus. The majority of draftees sign for a bonus of $5000 or less.

Minor leaguers make almost nothing – less than minimum wage, according to a pending class-action lawsuit. So it’s unlikely that he’s been able to save any of the money he made in salary while in the minors.

$2.6 million is a lot of money, though, so he should be fine, right? Taxes are going to take a huge chunk of that, and even the thriftiest person would have spent some of the money – a new car, a modest house in the suburbs (LA isn’t cheap), maybe helping mom and dad pay off their mortgage, and of course, food. I’ll speculate that maybe he has $1.2 million left. Heaney is 24 years old, so he may need to stretch that money 50-60 years. With some fortunate investing, he might be able to do it – or he might end up selling athletic supporters at the sporting goods store when he’s in his sixties. 60 years is a long time to stretch a million dollars.

So Heaney decides to hedge in order to avoid his worst-case scenario. Was he smart to do it? Let’s look at some factors.

It’s true that baseball contracts are guaranteed – but until a player reaches free agency a team has “control” of a player, which effectively means they can sign him to one-year deals at below-market rate deals. The deals grow closer to market rate as the player gets closer to free agency. Heaney will be eligible for free agency after the 2021 season, at which point he would be free to sign a multi-year deal with any team. (Note: This is a fairly simplified explanation of how the system works. I’m leaving out details for the sake of clarity.)

There’s one big catch, though. Heaney must be perceived to be a valuable commodity in order to secure a big deal. Heaney is seen as having good potential, but he’s certainly not a lock to become a superstar. It wouldn’t be a shock if he flamed out early either due to injury or poor performance.

A few years ago, Daniel Bard was a hot prospect for the Boston Red Sox. He was their first-round draft pick in 2006 and their minor league pitcher of the year in 2008. He pitched as a reliever in the majors for three years (2009-2011) and did well – among other things, striking out ten batters per nine innings pitched. However, at the end of 2011, something went wrong. As Wikipedia states, “He finished September 0–4 with a 10.64 ERA… Based on win probability added (WPA), the player most responsible for Boston’s collapse was Bard.” In 2012, the Red Sox decided to put him in the starting rotation. He didn’t get any better than September. His strikeout rate dropped while his ERA swelled. He gave up more homers, he walked people, he hit batters. He was sent to the minors and continued to suck. In 2013, the Red Sox waived their rights to Daniel Bard. Daniel Bard earned roughly three million dollars in the major league.

If he had been able to sell 10% of his future earnings (~ $300,000) to FanTex for $3.34 million, it would have been a great deal for him.

Daniel Bard just suddenly lost his ability to get batters out. This is not particularly uncommon. Rick Ankiel was having a great career when he suddenly developed control problems and quit pitching, later resurfacing as a pretty mediocre outfielder (career earnings: ~ $12 million, almost all of which he earned because he was able to transition to being a hitter – something that most pitchers can’t do).

There’s also the risk of injury. A third of major league pitchers have Tommy John surgery, which replaces the ulnar collateral ligament in the elbow. It’s a tremendously successful surgery that has extended the careers of a great many pitchers. Tremendously successful – some studies claim a 90% success rate – still means that sometimes it doesn’t work. 10% of the time, the pitcher never bounces back to pre-surgery form.

The downside of Heaney’s deal with FanTex is that he might earn huge amounts of money and be selling a 10% share too cheaply. If Heaney turns into the next coming of Clayton Kershaw, there may be a $300 million deal in his future. In that case, he would have sold $30+ million in future earnings for just $3.34 million in 2015 dollars. However, given Heaney’s age (which affects career length), status in the sport, and the fact that most pitchers are in decline by their mid-30s, I’d peg an estimate of Heaney’s career earning at somewhere between $50 and $150 million. In my best-case earnings scenario, he’d be selling $15 million in future earnings for $3.34 million.

The $3.34 million from FanTex, after taxes, would probably grow his nest egg to about $3 million. That would allow Heaney to invest pretty conservatively and probably still be able to avoid ever having to work a “real job”. While it’s true that he might end up losing money if he ends up earning $150 million, the fact that he managed to earn $150 million will help soothe the pin.

Essentially, Heaney’s saying that the difference between his current earnings of about $3 million (this includes his signing bonus) and $6.34 million is more important than the difference between $138.34 million ($135 million + $3.34 million from FanTex) and $150 million.

I agree with him.

Case 2b: Andrew Heaney (2017)

Kosmo following up in 2017 on those thoughts on Heaney.

When I last wrote about Heany, he was a decent, but not great, pitcher. I also noted the risk of injury.

What happened? Heaney pitched six innings in 2016 and begin experiencing elbow discomfort. The Angels tried stem cell therapy as an alternative to surgery. However, this did not prove successful, and Heaney underwent Tommy John surgery in June. With a 12-18 month recovery time, he might be ready to return by the end of 2017 – but it’s just as likely he won’t pitch again until 2018.

Heaney will still accrue major league service time for the 2016 and 2017 seasons. However, when he hits arbitration after the 2017 season, he’s not likely to get much of a raise.

In my earlier article, I suggested that Heaney might have career earnings of between $50 and $150 million. The upside is probably a bit generous at this point, but it’s still quite possible that he exceeds the $50 million. Selling 10% of future earnings of $50 million for $3.34 million is pretty much a push, given the time/value of money. If he hits $100 million in earnings, the Fantex deal will end up costing him money.

But there’s still a big caveat. Not every pitcher bounces back from Tommy John surgery. There’s a small, but very real chance Heaney never pitches again. If that happens, the Fantex investors will get almost nothing for their $3.34 million investment.

While both of these hedging decisions appear to have been smart ones, this isn’t always the case. Many young players sign extensions that cap their earnings, and many would have been better off not signing the extensions. However, the stories of Singleton and Heaney highlight the negative situations that those playing are trying to hedge against. While it’s true you want to bet on yourself, it never hurts to hedge.

Case 2c: Andrew Heaney (2021)

Heaney didn’t pitch much in 2017, just a handful of innings. However, in 2018 he had a very good, but not great season starting 30 games – typically a full season. In 2019, he started the season and got injured again. He ended up pitching half a season and being a little better than average. In the COVID-shortened 2020 season, Heaney returned to his very good form of 2018.

From 2017 to 2021, he’s made $15.8 million which isn’t a lot for a starting pitcher. At 30 years old, he’s got time left to make good on FanTex’s investment, but for now, it’s looking like Heaney was smart to take the guaranteed money years ago.

Case 3: Randy Newsom

Back in 2008, Randy Newsom sold shares of his earnings on the public market. Some of the writers at The Slate decided to invest in him.

How did they characterize their investment back then:

If Newsom makes $1,000,000 over the course of his major-league career, the Slate investment group will take a loss, earning a piddling $96 on an initial investment of $143.82. If he makes $10 million, we’ll get $960. And if he makes Barry Zito money? I won’t be retiring early, but I’ll be able to watch my baseball-playing property on some nice plasma TVs.

(Ahhh, plasma televisions and Barry Zito. I miss that part of 2008.)

I looked up Newsom’s career and best I can tell he never made it to the majors. The poor writers at The Slate would seem to have lost the entirety of their $143.82.

As best I can tell, the company that helps facilitate the deal, Real Sports Investments is not around anymore. This experiment went bust it seems.

Final Thoughts: Invest in Sports Players

It doesn’t seem like there’s currently a viable way for individual investors to bid on sports players’ future earnings. If this became more popular and was diversified across a number of players like Big League Advance does, I would be interested in investing. Until that happens, the closest I will be able to come is that nearly worthless pile of baseball cards that I have in my mom’s attic.

For further reading on investing in athletes see this article.

Programming Note: This Saturday, I’m hoping to bring you a special blog post. It will have a lot less personal finance than a typical blog post. If I can find the time to write it the way I want, it could be my longest, most in-depth blog post in 15 years of blogging.

Stay Safe a Stock Market Bubble/Crash

February 22, 2021 by Lazy Man 2 Comments

It may be time to prepare yourself for this stock market bubble to crash. Have you looked at your investments lately? Some people say that it’s good to just set and forget it with a few index funds and steady automatic deposits. Twice a year, check the asset allocations and see if they need to be rebalanced.

That advice should work well for most people. It doesn’t work as well for someone who writes about money nearly every day like me. I look at the stock market a lot. Overall, I know I should be invested in the stock market for the next few decades of my life. This is one of those times that I’m finding it difficult to stay invested. Last January (2020), I realized that in the previous decade our investments had quadrupled. That made me nervous that we might have a market crash. COVID hit, and we did have a short market crash. Now our investments are up another 40% from there.

I like seeing the big numbers when I log in, but now I don’t want to lose them. How do you stay fully invested and still prepare yourself for a stock market crash? That’s what I wanted to explore today.

Is the Stock Market in a Bubble?

In my opinion, the stock market is in a bubble. I’ll make a case with a few examples below, but it’s important to understand that this is my opinion. There are plenty of expert opinions out there who say that the economy is doing very well and it’s only looking brighter with summer and more vaccines. (Of course, there are the new variants of COVID, so maybe not everything in the future is looking rosy.)

If you don’t think the stock market is in a bubble, you don’t have to do much. Also, if you are in the stock market for decades, you may not care either. I don’t know if a crash has ever lasted long enough to derail that plan.

For now, let’s just assume that the stock market is in a bubble.

What Causes the Stock Market to Crash?

The stock market can collapse for quite a few reasons. The usual themes are people being overconfident that the stock market will make big returns (sometimes 20% or more) year after year. Here are some of those reasons why a stock market crashes.

Speculation

One reason stock markets can crash when people feel like they simply can’t lose money. That’s when people make crazy bets that make no sense. There were a lot of these around 2000 when internet stocks were all the rage. You can see some of this today with meme stocks like GameStop. Or as the kids say today, “STONKS, only go up!”

Too Much Leverage

Sometimes people borrow too much money and have trouble paying it back. This is what happened in the sub-prime mortgage crisis in 2008. (There was more to it, but this is the simplified version).

In the 1929 crash, people borrowed money to invest and when those investments stopped making money, it collapsed.

Macroeconomic Conditions

That’s a big word for what I like to call “juiced markets.” Certain economic policies by governments can create a favorable environment for buying stocks. Recently, we’ve had a big combination of these with quantitative easing, low interest rates, tax cuts for corporations (allowing them to buy back stock to boost stock prices).

These “juiced” market conditions help the markets go up and stay up. However, it’s hard for them to continue forever. It’s just not sustainable. When things go back to normal there’s a risk of a drop in the stock market.

Political Risk

Fortunately, the United States is in a fairly good place politically. I don’t think we’re going to get involved in any wars soon and we’re building back relationships with our closest allies. Also, to some degree, the world is united to fighting a common foe, COVID.

Stock Market Panic

Sometimes one or more of the above things cause the market to go down. When people see this, they get worried that they are going to lose their money and start to sell. This can cause prices to go down further. The snowball effect of selling and low prices grows and grows.

“When is the Stock Market Bubble Going to Crash?”

I’m so happy you asked this one. My kids ask questions like this and I answer them, “On one of the days that end in -day.” I’m full of bad dad jokes that annoy them to no end.

The truth is that no one knows when the stock market is going to crash. My crystal ball has been at the repair shop for years.

However, if I were to try to read the tea leaves, I’d say that there’s a lot of over-speculation going on. The classic example is GameStop, but you can also see that people have become accustomed to 20% gains for around a decade now. Even when there are sell-offs such as the one at the beginning of the pandemic, they don’t last long because people come in to buy more stocks while they are cheap.

It’s impossible to know when a bubble is going to pop because the market can always go higher. There’s no magic number that signals to everyone, “Start selling now!”

So do you just give up because it is impossible? No. There are indicators that can help you know if the stock market is in bubble territory. Here are a few of them:

1. Shiller P/E or CAPE

My favorite indicator of a possible stock market crash is Shiller P/E or CAPE. It’s the raio of price to earnings. If you look at the graph you’ll see some sharp spikes around certain dates:

You can see the rise in stocks in the “Roaring 20s” leading to the “1929 Crash.” More recently, you can see the crashes in 1987, the dot-com bubble and bust, and the great recession of 2008.

What you may also notice is that the stock market doesn’t stay above 25 for long without a crash… except for the last 5-6 years. We’ve been averaging being above 30 during that time.

A case could be made that there’s a “new normal” of stock investing that wasn’t available in the 1920s or 1987. I can believe that argument, but I think that pushes the market to a 25 P/E. Another line of thought is that earnings are low due to the pandemic and that prices are looking forward to the future when they recover. I can believe that as well. You can even blame TINA.

However, these are all justifications for what we can see clearly, stocks look historically very expensive.

Again, this doesn’t mean that a crash is coming tomorrow, next week or even within the next year. The market could continue to go up for a long time. However, it seems historically likely that you’ll have a chance to buy stock cheaper than this within a few years.

2. Buffett Indicator

Another way to measure whether the stock market is overvalued is to use the Buffett Indicator. This is the ratio of total US stock market valuation to Gross Domestic Product (GDP). The website Current Market Valuation has a great graph of this over time.

The (much oversimplified) theory is that if the stock market has gone up a lot and we aren’t producing more product, that’s not a great sign over the long haul. The website above does a much better explaining it in detail. It also explains that the markets may be particularly high now due to low interest rates and other “juiced market” factors that I mentioned above.

As you can see the indicator shows that the stock may have been more overvalued than it was in the dot-com bubble.

3. Household Equity Percentage

There’s a third indicator based on household equity percentage. I don’t have a recent chart of this. The first two indicators were enough to validate what I was feeling. More information on this can be found at that last link.

How to Keep Your Money Safe in a Stock Market Crash

I’ve been fortunate enough to have blogged through the 2008 crash. At that time, my wife and I were 30 years old, with decades of earning and investing. Here are a few tips that I’ve learned and what I’m actually doing with my money now.

Diversify Your Investments

This is said so often that I feel like people take it for granted. It’s good to have broad-based index funds. However, I often see people focus their investments in the United States. There’s a whole global economy out there and some stock markets may not be as juiced as others.

Additionally, the main index funds for the United States have a lot of technology stocks. I love technology, but I saw how they crashed in 2000. I don’t see a similar thing happening to Apple, Google, Amazon, Microsoft, or Facebook, but a lot of those stocks are under heavy pressure from countries all over the world simply because they’ve become more powerful than the governments of many countries themselves.

Because of all this, I recommend removing tech risk from your portfolio. I did this and I still have a lot of tech risk in my portfolio. I don’t make big changes in my portfolio all at once, so it takes a while for me to shift some investments.

This may be a good time to explore REITs, gold, maybe even a little bitcoin. I’m a big fan of REITs, but not so much the other two. With people doing more work from home, I’m less excited about REITs that may have office buildings.

Switch to a More Conservative Asset Allocation

Last February, I sold off some stocks and bought more bonds – but it wasn’t much. I was still about 90% stocks and 10% bonds. I wanted to preserve those big investment gains of the previous decade. When the COVID crash happened, my portfolio dropped a little less than the major stock indexes. It was still a very big drop. However, I was able to sell off the bonds on the way down and buy more stocks until I was about 100% stocks. Now with the stock market at new records that move looks to have paid off.

What I’m going to do differently now, is have more than 10% bonds. It’s hard because bonds aren’t paying good interest rates now. It’s still the best way I know to stay invested and not lose your shirt in a stock market crash.

Invest in More Dividend Stocks

I took a large amount of the money that I typically allocate to the United States total stock index (an ETF under ticker symbol VTI) and moved it to a high-dividend ETF under HDV. HDV has less technology and more boring companies that tend to make money and pay dividends. I think this is a more defensive way to invest.

Unfortunately, HDV wasn’t ideal to protect against a COVID crash because it has some big oil companies. If it had been around during the tech crash of 2000, I think it would have done a lot better. It likely would have done better during the Great Recession of 2008-2009.

Final Thoughts on Stock Market Crashes

Do you think the stock market is going to crash? Do you actively look at or think about these things (or is it just a personal finance blogger thing)?

(I realize I may have shifted from “my” and “our” portfolio a lot in this. I actively manage my own portfolio while my wife passively manages hers. Only at our monthly net worth meetings do I have visibility into her side of things. It’s further proof that passive investment is just fine.)

GameStop/Reddit: What to Focus On

January 31, 2021 by Lazy Man 1 Comment

By now you’ve probably read about the GameStop/Reddit saga. In fact, you’ve probably read more than you care to. Even though I know it was gambling, I had some serious FOMO. Nonetheless, I feel like I need to address it. It’s not often an “investing” (gambling?) topic becomes the most talked about topic on the internet.

It took my wife until last Thursday to ask if we had any GameStop stock because she just caught the news. (Bless her for being able to focus on work. I wish I had that kind of attention span. Squirrel!)

If you are still catching up or just want one place to catch up, the best information I’ve found is this Vox article.

It’s impossible to have unique thoughts on something so many people have written about, but here’s what I think deserves more attention than it seems to be getting:

There are great stories of Gamestop/Reddit helping people.

This 10-year-old cashed in on his gifted GameStop stock from a couple of years ago. He’s got an interest in the stock market now and is investing 1/3rd of it. What about the other two thirds? It’s going in a savings account.

In the WallStreetBets forum, I read stories about the money paying off college loans and helping with medical treatments. There’s a genuine story of the money from billionaire hedge funds losing money to change the lives of retail investors.

GameStop/Reddit Will End Badly

I have been watching the WallStreetBets Reddit and it seems like no one is stating the obvious. It’s probably because “the obvious” is against the mission. Any mention of it is likely to get voted down.

There is one obvious conclusion to the GameStop saga. What goes up, must come down, unless there’s a business to support the price. GameStop business can’t support the price of a $25 billion-dollar company. It doesn’t have the profits. Maybe it can raise money and retool its business to make those profits, but it would take years. Most people don’t like their money tied up doing nothing for that long, so they’ll sell.

That’s the best-case scenario of how this ends. The typical is that people get bored in a week everyone tries to sell as it goes down. It’s a bad game of musical chairs. There are going to be stories of people who bought in at $300 a share only to have it be worth $20 a share. Unfortunately, there will probably be some extreme stories about some people who invested their entire retirement savings only to have it be worth several thousand dollars now.

3. The Fed’s Helped Create this Mess

gamestop pokemon go — The closest I’m getting to GameStop stock is playing Pokemon Go.

I have to give credit for this idea to Peter Boockvar. He notes that the Federal Reserve has been keeping interest at (or near) zero for a long time. This discourages people from using safer investment vehicles like CDs or simply a savings account. No one wants to earn 0.1% interest in a bank account. I can see many people thinking, “why not get the Robinhood app and try to make more?”

I think a better plan would be these income investing ideas.

The GameStop/Reddit frenzy isn’t new

I remember the pump and dump schemes on Yahoo Finance message boards back in the 1990s. As one Reddit user described WallStreetBets (somewhat paraphrased): “We’re a bunch of monkeys throwing [poop] around. The only difference is that this time we’re throwing our [poop] in the same direction due to a unique circumstance. Don’t expect that to continue.”

It’s true. There are many people looking for the next GameStop to get on-board the train, but it’s difficult. AMC has done well if you got in early enough. Other meme stocks like Blackberry seem to have gone nowhere after an initial jump of attention.

New Opportunities Will Emerge

Whenever something ends badly for one group, there’s usually an opportunity for another group. I’m not sure what that may be yet. Maybe people are burnt so bad that they run to value stocks that pay good dividends.

I have read that the stock market being down overall the last few days was due to the market getting nervous about this GameStop/Reddit frenzy. The market is only about 5% off its highs, but that means millions of people are dollar-cost averaging with their 401ks at lower prices.