Entrepreneurial Fuel

This past week has once again reiterated that there are no free lunches (or coffees for that matter — the cappuccino with tip is now approaching a solid $6). All hail Venice! In between meetings and struggling to find the energy to head into the beast that is the WeWork money printing machine, I find myself Apple Mac wide-open with the other twenty or thirty guests. Literally one, oh wait two, non-Apple laptops in the house. Maybe AAPL isn’t overvalued at an $800 billion valuation. While that is another story, the general market volatility is something worth discussing. From the close of the market on Monday, January 29th until the close on Monday, February 5th the S&P 500 Index fell over 7%. The clients invested in my Registered Investment Advisor, Caravela have grown accustomed to me preaching discipline. My best attribute is gaining your trust to remain disciplined during both peaks and troughs. But I admit, starting a firm in late 2016, eight years into a raging bull market, only to watch it continue has been tough. I am not a bear, but I do rely on fundamental valuations. Traditional investment techniques have been engrained in me from the beginning by the likes of Benjamin Graham, author of the Intelligent Investor.

But investing isn’t about beating others at their game. It’s about controlling yourself at your own game. — Benjamin Graham

Going into 2018, I prepared myself for the market to continue to defy odds. I certainly am not a speculator, I consider myself a long-term allocator of capital. I try to take the burden of investing one’s assets off of their shoulders by instilling trust that I know what I am doing and you can rest easier at night knowing I am a fiduciary of your wealth. Essentially, a fiduciary is a person or organization that owes to another the duties of good faith and trust. Side note, if you have your assets managed by someone or some entity be sure they are a fiduciary, be sure they have your best interests in mind — because many don’t! As the year began, the markets kept accelerating upwards while I continued to position my client’s portfolios more defensively, adding more inflation protected securities, gold and commodities while lowering weightings to developed and emerging market equities. For clients that allowed for additional hedging techniques, I purchased call options on the VIX and put options on IEMG (the emerging markets ETF). While emerging markets continued to roar, my VIX call options became very interesting in the past few days. Again, I am not a speculator. The option strategies are used to hedge my client’s portfolios.

The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market’s expectation of volatility implied by S&P 500index options, calculated and published by the Chicago Board Options Exchange (CBOE). It is colloquially referred to as the fear index or the fear gauge.

For a long time, volatility has been at historical lows. Structured products like XIV capitalized on this low volatility. Many hedge funds seeking “free lunches” bought the Credit Suisse product to the tune of billions of dollars. It paid off handsomely, until it didn’t and when it didn’t, it fell precipitously. As in over 80% in a day. Now people question how this happened, was something wrong? The short answer is no. Volatility spiked and this product bet in the opposite direction. So if you were holding XIV overnight you would wake up 80% lighter. That includes preeminent hedge funds and investment houses like Two Sigma, Citadel, Morgan Stanley and Deutsche Bank. Whoops. Credit Suisse the creator of this instrument had a trigger that would allow for liquidation should the fund drop like this. No recovery for these holders. Rather than go into a great deal of explaining, the simple moral to the story is understand what you are getting yourself into. Look at history, the VIX remains calm until it doesn’t, trying to capitalize on that puts you in constant jeopardy of a spike. Once the spike occurs, for whatever reason, its to late. This is gambling. I didn’t know if or when the VIX would spike, but I do believe in mean reversion, the measure had been at historical lows for some time and with our political and investment climate it wasn’t likely to continue forever.

As I sit in one of the original uber-trendy coffee spots in LA, I ponder the upcoming launch of Divvy, the first social-saving app, geared toward creating a simplified financial world where you can share your personal aspirations within a community to save towards and attain common goals together. Will it find success attracting users who have struggled with saving on their own? Will the power of community help people accomplish their goals? What it won’t be is an esoteric structured product like XIV that “smart” institutional investors capitalize on at the expense of the little person. If you are struggling to get your footing as you start out in your career, or even if you have hit some bumps in the proverbial road of life and you are a bit older, the first step is saving. The investment part comes later. Everyone hears about the power of compounding, but that power is generated when you have built up some meaningful sum of money. Divvy is the first step in shifting a society reliant on credit to one built through savings. If we can start changing a behavior, we can help future generations avoid the financial pitfalls we have experienced. Once savings have become a way of life, then we can start talking about investing and I assure you that conversation doesn’t start with XIV, nor Bitcoin for that matter!

But back to Intelligentsia, is it a start-up accelerator? Am I getting smarter simply by sharing the same oxygen (and coffee beans) as the others staring down at their laptops? What is going on at 3pm on a Wednesday that has this placed packed? Have I spent too much time in corporate to understand that everyone now works remotely, but if so, why are the highways still jammed? I’m perplexed. I try to Airdrop a photo from my phone to my laptop, but since I got the iPhone X the X has stood for “strikeout” as in a lot of functionality no longer works. I can see the phones and laptops of everyone else on my laptop. Should I pose the question and Airdrop to all my new friends? Maybe this becomes my new office, it provides much better coffee than WeWork, it doesn’t serve beer, but apparently WeWork doesn’t either (they seem to be testing kombucha for quite a long period). In any event, if you can find a seat, check it out, the creative juices really flow, but know, there is only one bathroom. Gotta run!