“Our Newsletter’s Most Recent Returns: 118%, 546%, 1,537%!!!!” Sneaky, Sneaky…

If you’ve been learning about investing for any amount of time, you’ve probably received some emails or Facebook ads similar to this. It’s an old marketing ploy used by tons of options and stock newsletters* Are those types of returns possible? Yes, but not in the way you think…

Here’s the catch, most often when they talk about returns they are secretly referring to what are called annualized returns. Essentially all that means is that a pick of theirs may do very well over a period of days or weeks. They then estimate how much of a return you would get if they kept that rate of return up for an entire year. On top of this first catch, people tend not to notice that the recommendation “ideally” only uses a small percentage of the money (capital) in their account. They may not want you to spend any more than 2-5% of your money on any one stock, fund, option, etc.


Let’s Learn How To Lie With Numbers!!!

get him to the greek


So your  newsletter recommends an option to buy and you have $100,000 in an account.
(DO NOT be embarrassed if you have no way near this. This is just a round number)

The newsletter recommends an option to buy. It also recommends you not use more than 1% of your capital for this one trade.

That means you should spend more than 1% of your account on any one option recommendation. To make this easy, you spend all $1,000.

The option does very well and in 2 weeks has gone up 56%. Totally reasonable expectation with a decent options play. Now to lock in that options trade they recommend closing out the trade. So you’ve made 56% in 14 days. Super.

Here’s where the sneaky part comes in. 2 weeks is 14 days (obviously) and in finance we never use 365 days to estimate a year, we use 360.

So in 14 days we’re up 56%. As a decimal that is .56 (56% divided by 100 to get the decimal).

So how much of a return is that per day? We divide .56 by 14 = .04. The option made 4% per day. Not bad at all.

Now if we want to find out the annualized return we multiply the daily return rate by 360 (one financial year) So .04 x 360 = 14.4. Now multiply it by 100 to get that number as a percentage and we get 1,440%!!!!!  

They just made you 1,440% (annualized) on just ONE recommendation!!!

Oh wait, we forgot that was only on $1,000… and really you only made 56% on that option.  That’s $560…

Now $560 is nothing to sneeze at, obviously. But remember you have $100,000 in your account. $560 is .56% which the stock market may go up or down in a single day…

That newsletter made you .56% on your account, not 1,440%. Bit less impressive, huh?


This is how investment marketing works. They’re not REALLY lying, but they kinda are. They’re lying with numbers people don’t understand, not with words people DO understand. You just have to know how the math works and know where to find the disclosures. Next time you see an ad promising returns like this, ask yourself what is more realistic .56% or 1,440%. Good rule of thumb: if the primary marketing tool of an investment is the promise of a specific rate of return, run for the hills. Beware of wolves in newsletter’s clothing.






*For those who don’t know, investment newsletters offer you stock/funds/option picks to buy or sell with every issue (generally monthly) There ARE some fantastic newsletters out there, but they are few and far between. Prices range from about $40 up to $5,000+ for any one newsletter. Combo deals of multiple newsletters can reach over $25,000+.

PG&E’s Bankruptcy: How It Affects Investors and More Things For Californians To Get Mad About (UPDATE)

PG&E’s stock (PCG) crashed 48% this morning after reports that the CEO resigned yesterday and the company will be filing for Chapter 11 bankruptcy. California law mandates notification of intent must be made at least 15 days prior to filing, so we can “expect it to become official” on January 29th. We’ll come back to that in a minute.


pcg stocks bonds zerohedge
Source: ZeroHedge

“PG&E expects that the Chapter 11 process will, among other things, support the orderly, fair and expeditious resolution of its potential liabilities resulting from the 2017 and 2018 Northern California wildfires, and will assure the company has access to the capital and resources it needs to continue to provide safe service to customers” – PG&E


Typical corporate speak for a public announcement. Governor of California Gavin Newsom essentially said the exact same thing. Oh, the company did forget to publicly mention one thing that the privately disclosed to SEC…


“Williams (CEO) will receive severance. That payment will likely be $2.36 million to $4.46 million, depending on how her departure is categorized, according to the firm’s most recent proxy statement (8-K). She also has $3.1 million of pension benefits that may be in flux if the firm enters bankruptcy court. She was paid $8.6 million in 2017” – Bloomberg

Maybe they’re just getting better at cherry picking what to say to the public. In all fairness, they probably picked up some pointers when they first filed for Chapter 11 in April 2001. Without getting into the details (Google it) PG&E emerged just fine 3 years later. Most people understandably don’t know what Chapter 11 means, so the quick answer is that it means that the company is “restructuring” to get out of debt aka it’s working out a payment plan. While they figure out how to pay all of this crap off (about $30 billion in liabilities), nobody can touch them. They also don’t have to pay interest to any of those bond holders they hiked up their rates for. 

Here’s what the SEC’s says about Chapter 11: “During Chapter 11 bankruptcy, bondholders stop receiving interest and principal payments, and stockholders stop receiving dividends. If you are a bondholder, you may receive new stock in exchange for your bonds, new bonds or a combination of stock and bonds. If you are a stockholder, the trustee may ask you to send back your stock in exchange for shares in the reorganized company. The new shares may be fewer in number and worth less. The reorganization plan spells out your rights as an investor and what you can expect to receive, if anything, from the company.”

OK…that was boring. Obviously, the first thing you have to know, is they don’t pay anybody anything (well, except for that CEO that’s leaving). Everything is essentially frozen. Then they come up with a payment plan to get out of debt (which must be agreed upon and approved in court). If that doesn’t work out, the assets are going to get divided up so that ideally everybody get paid off. The hierarchy of who gets paid first goes like this

  1. Taxes (paid first, of course)
  2. Secured Debt (loans they took out and posted collateral for)
  3. Unsecured Debt (the majority of bondholders and those liability claims)
  4. Preferred Stock Holders
  5. Common Stock Holders

We’re going to go ahead and guess that 90% of you don’t know what preferred stock is, so when we talk about stock we’re talking about common stock. Stock owners are on the lowest rung when it comes to getting their money back when things go to sh*t.

pge bonds1
PG&E Debt Breakdown

So the current situation looks like this: PG&E doesn’t have to pay anybody anything. The CEO will get millions in severance. People who are “customers” still have to pay the higher rates that state approved in 2017. Another rate hike may be coming if the state approves it. California may also decide to go with a form of a statewide tax bailout like it has in the past (2001)

So that means there is something that is still POSSIBLE…not likely, but possible. That PG&E is basically bluffing and that California will announce a further form of bailout before the bankruptcy actually goes into effect. While both the company and the state have both publicly stated that they see no other option than bankruptcy, remember how back in November the state head of public utilities commented that he couldn’t foresee the possibility of letting the company go bankrupt? Then the stock shot up about 37%?

As of writing, shares are trading at $8.20. That means the company is still priced at about $4.25 billion. Moody’s and S&P dropped PG&E’s credit ratings to junk last week, but several levels higher than their credit rating was in 2001 when this happened (Moody’s Baa vs Caa2). Bonds are still trading in the 75-85* range vs 55 back in 2001. Imagine, what happens when the markets price for bankruptcy and California even mentions some form of bailout or further protection. Obviously, some investors are betting on exactly that. We sure as hell aren’t saying that this bankruptcy won’t take place, but remember it’s not official for 15 more days.


*Bond pricing is based off $100 par value (which is actually $1000 …yea, bonds are confusing). So $75-$85 means the bonds are trading at a 15-25% discount to what they would trade for if the company was in good shape.


NOTE –  Here’s a stupid, but effective way to remember the bankruptcy hierarchy. Tea Soup for the Commoners. TSUPC.
Tea (T for Taxes) Soup (SUP – Secured, Unsecured, Preferred) for the Commoners (Common stock holders).



Further Reading:

PG&E, utility tied to wildfires, will file for bankruptcy (CNN)

PG&E stock crashes nearly 50% as utility says it will file for bankruptcy because of wildfires liability (CNBC)

PG&E’s Former CEO to Walk Away With Millions After Wildfires (Bloomberg)

PG&E CEO Resigns, Utility Signals That Bankruptcy Looms (The Street)

PG&E Stock Is Plunging Amid Bankruptcy Talk. Here’s Everything You Need to Know (Barrons)

PG&E Was A Hedge-Fund Darling. That Bet Flopped (WSJ – A Must Read for Investors)

PG&E Prepares for Bankruptcy Amid Wildfire Fallout (WSJ)

California lawmakers traveled to Hawaii with utility executives as wildfires raged
(Fox News – the only popular conservative site we found with any news on PG&E)

PG&E Bonds Crater, Shares Crash 50% As CEO Quits Ahead Of Bankruptcy Filing (ZH)

Embattled PG&E Has Long History With California’s New Governor (Bloomberg)

PG&E State Review Puts Board Shuffle and Breakup on the Table (Bloomberg)

PG&E bonds fall; Calif. outlook cut (MarketWatch 2001 Article)


The Big 3 Types of Funds: Mutual, ETF, Closed-End… The Necessary Explanations

Below you will find links to Investopedia’s dry, long-winded explanations as well as ours, which will give you a good enough understanding that articles make sense. Use the links or google if you still have questions. And yes, some of the definitions are repeated on purpose.


Learn these words first:

Buying a stock is  buying a share (or portion) of a company, but only that one company. A fund is more like a basket that can hold lots of different stocks or investments. So instead buying a portion of one thing, you can buy a portion of lots of things at once. Investors in a fund are buying a share of the basket.

There’s somebody actively making decisions on what to buy and sell in a fund.

Nobody is making decisions, the fund tries to follow an index as closely as possible.

A number that is follows how well or poorly things are doing compared to history. For instance, the Dow Jones takes 30 big companies in the US, adds their stock share prices together and based on the result people can gauge how the stock market is doing. Indexes (or indices) usually follow different markets based on things like size of companies, geography, how they grow, etc. People who want to just “buy an entire stock market” like the US stock market can then just buy a US stock market index.

Net Asset Value
The value of all the things in the fund or “basket” added together.


The Fund Types:

Mutual Fund
An investment product that pools money together in a basket to invest in stocks, bonds, real estate, etc. Mutual funds will have a stated objective to decide on what it will buy. They can be active (with a manager choosing  what to buy or sell) or passive (just following an index without making decisions) They can create as many shares as they want for investors to buy into this basket or “pool of money”.  The price of the fund’s shares are calculated after the markets close and the value of all things owned by the fund (Net Asset Value) are divided by the number of shares available. Mutual funds only trade once a day, after market close. Taxation on mutual funds is different than other types of funds. Typically carry a lot of hidden fees that are disclosed in small print. Usually the only type of fund available in a 401k. Mutual funds are largely outdated and individual investors nearly always prefer ETFs.

ETF (Exchange-Traded Fund)
Nearly everything is the same as mutual fund as far as active/passive investments, but these can trade any time the markets are open, just like stocks. Fees and expenses are usually much less than mutual funds. Taxation of the fund depends largely on what the fund does. Like mutual funds, can create or destroy the number of shares available in order to fit with objective of the fund. SPY (that’s the symbol, but is said just like the word) is the most commonly traded ETF in the world, it follows the S&P 500 index.

Closed-End Fund
Almost exactly like ETFs, but only have a finite (limited) number of shares. Because of the limited number of shares, a great opportunity can arise: if there isn’t much demand for the fund’s shares, but the value of assets (NAV) held by the fund haven’t dropped, investors can essentially buy the stocks or assets at a discount. Most commonly used by investors looking for income.


Other helpful links:

Active vs Passive Investing

Mutual Fund vs ETF: Which is Right For You?

Closed-End vs. Open-End Funds

How To Start Fires and Force Customers To Pay For Them

Reuters released another market bomb this morning. PG&E (PCG*) is getting closer to filing for bankruptcy protection. In case you hadn’t heard, PG&E is the company largely to blame for California’s Camp wildfire in 2018 …and the wildfires in 2017. It all because of sparking, under-maintained utility lines. We’ll also throw out there that they’ve also been found guilty of causing disasters in 2010, 1997, and 1994 to name a few. California is already one big tinderbox when it doesn’t rain and that does certainly cause a problem. But a fairly simple issue to address is when a utility company has a long track record of not trimming back growth from their lines. Multiple years in a row citizens have reported seeing their utility lines throwing off sparks hours before the fires started. In the past, the company has gotten away with tap on the nose and a multi-million dollar fine. Reason? They supply power to almost half of California.

California isn’t a right to choose state. Depending on where you live, you pretty much have to go with the one company that supplies power to your area. So it’s pretty easy to understand the big, black pickle that arises for the state when things like burning city-sized chunks of land and killing people happen. You can’t just shut down the only company that provides power to your citizens. Even if you you’re considering charging the company with murder and manslaughter.

The company was already on the line financially for it’s involvement in the 2017 wildfires, and with the new liabilities added in they’re looking at about $30 billion in total. The problem is that, as of today, the company is only valued at about $9.83 billion (shares dropped 22.34% today). They already maxed out their credit back in November. They also used another new lifeline last year; bonds they were allowed to issue because of a new Governor endorsed bill. Then in December, they requested that the state allow them to pass on a rate hike to their customers to the tune of $2 billion dollars.

The next logical step is bankruptcy, which they say they are “trying to avoid”. Filing for bankruptcy will allow them to evaluate their options while being shielded from liabilities. One option being considered is selling off their gas business to help finance paying off death and injury charges. The other is to issue more of those bonds used in 2017.

For the new guys, a bond is basically an IOU with interest. If you need money for a project, you borrow the money from investors by selling bonds and pay interest on the loan until you can give the entire amount back. In 2017, as an emergency measure, the governor of California signed a bill saying that PG&E could issue bonds (financed by customers) to allow the company to secure money to pay off their liabilities. Obviously, the state couldn’t allow the company to just go under. Signing this bill was viewed as a way to settle the matter for good. We know this because the bill didn’t say anything about allowing them to issue bonds in 2018 or going forward. But that’s exactly what PG&E was hoping to get approval for when they asked for the customer rate hike back in December (decision still pending)

The 2017 bonds were a pretty nice little proposition for investors. They get to invest in a bond where the only real risk is if citizens decide they don’t need to have their electricity turned on anymore. PG&E gets the loan, and the investors get the interest paid from surcharges levied on customers that can’t use any other company. As of today, with liabilities stacking and bankruptcy looming, the bonds outstanding are all over the place in value from the low 70’s to low 90’s. All bonds traded today are at least 8% below par value (which means they’re selling at a discount). Bond investor’s (which some view as the “smart money”) don’t seem to know what to expect. This is getting into fairly unprecedented territory.

With stock shareholders (PCG), their sentiment is a bit more obvious. The stock tanked over 22% today when the news was released. However, we’ve already seen once in the last few months what happens when the state even talks about stepping in to help these guys out. From November 8th to November 15th, 2018 the stock crashed from $48.80 to $17.26 as news about liabilities kept rolling in and people found out that the company’s credit was maxed out. Then, after market close on November 15th, Michael Picker (the head of the California Public Utilities Commission) reportedly said he “could not imagine letting PG&E go bankrupt as it faces billions of dollars in potential liability from the wildfires ravaging California.” The stock surged 37.5% overnight.

Utility companies, like PG&E are historically a great “defensive” play. Meaning that when the markets get shaky, people switch to stocks that they think can weather the storm and aren’t as susceptible to a crash. The protection offered from utility stocks is two fold: 1. Nobody will ever stop needing water and electricity. 2. They usually pay pretty high dividends (PCG paid dividends as late as October 2017) With a company like PG&E, the protection is even greater since they’re the only utility available in most of the areas they serve. “Sales” are essentially guaranteed. That explains why even after the fallout of 2017, hedge funds and institutions still held an enormous amount of shares of the utility company. In the third quarter of 2018 alone, Seth Klarman (a market deity) of Baupost Group loaded up on almost 14.5 million shares. After the November stock crash, some companies even decided to go even bigger or go broke. In a December letter to shareholders, BlueMountain Capital Management ($21 billion AUM) included a chart predicting insured losses for the two fires to be $11.7 billion total. They also wrote that the likelihood of back-to-back years of fires of Camp and Tubbs’ magnitude “was approximately 1 in 150.”

Our lesson is this…

You may see opportunity in these events to make money on things going up or down, but you don’t have to have money to be informed.  Right now, millions of Californians are footing the bill for a company that has habitually proven themselves to be irresponsible. Not only are customers paying the company, they’re paying investors interest for the negligence of their only electricity provider. You may agree or disagree with how the state is handling this issue, but when we say that learning this stuff can change how you vote this is exactly what we’re talking about.

According to the 9/30/18 13-F filings, the number of PCG shares owned by hedge funds went up 40.94% in the quarter between June and September 2018. The number of hedge funds that owned PCG shares went from 20 to 87. The Camp fire started November 8, 2018. There were 86 fatalities and over 18,804 structures destroyed.

Further Reading:

Exclusive: California utility PG&E explores bankruptcy filing – sources (Reuters)

PG&E stock tumbles 21% on bankruptcy concerns (CNN)

PG&E shares tumble after bankruptcy reports (FT)

After California fires, PG&E proposes raising electricity bills to bolster precautions (CNN)

PG&E Power Line Near California Wildfire Had Damage (WSJ)

Insurance companies sue PG&E over California wildfire damages (MW)

Blue Mountain has doubled down on PG&E since the wildfires (BI Prime)

Gov. Jerry Brown signs wildfire safety bill slammed as PG&E bailout (Mercury News)

*PCG is the stock symbol for PG&E
**Apx. 16 million customers vs California population of 39.54 million in 2017


Top Secret Portfolio Recipes (Asset Allocation)

Ok, some of these aren’t a secret. This page could also be called as “Don’t buy a book that makes you read 200 pages of boring shit just to get an allocation recommendation.” First and foremost, a lot of these are absolute garbage. The reason they’re being posted is so that more people will realize that books and blogs aren’t going to give you a magic bullet for allocation even if they cost an arm and a leg. Not everything you find on this page is hidden in a book, but for the sake of simplicity we’re just going to stuff it all into one page. Realize also, that a few of these have specific rules for entry and exit points which increase the risk adjusted returns.

7Twelve Portfolio – Craig Israelsen
(from 7Twelve: A Diversified Investment Portfolio with a plan)

  • 8.3% Domestic Large Cap Blend
  • 8.3% Domestic Mid Cap Blend
  • 8.3% Domestic Small Cap Blend
  • 8.3% World Total Stock Market
  • 8.3% Emerging Market Stocks
  • 25% Intermediate Term Bonds
  • 8.3% T-bills/Cash
  • 16.6% Commodities
  • 8.3% REITs

All-Weather Portfolio – Tony Robbins
(from Money: Master the Game)

  • 30% Domestic Total Stock Market
  • 40% Long Term
  • 15% Intermediate Term
  • 7.5% Commodities
  • 7.5% Gold

 All-Century Portfolio – Barry Ritholtz
(Ritholtz’s rebuttal to Tony Robbins)

  • 20 % total US stock market
  • 5 % REITs
  • 5 % Domestic small cap value
  • 15 % Pacific equities
  • 15 % European equities
  • 10 % TIPS
  • 10 % U.S. high yield corp bonds
  • 20 % U.S. total bond market

Black Swan Portfolio – Larry Swedroe
(from Reducing the Risk of Black Swans)

  • 15% Domestic Small Caps
  • 7.5% World Small Cap Value
  • 7.5% Emerging Markets
  • 70% Intermediate Term Bonds

Classic 60/40 – Jack Bogle
(The most commonly recommended stock/bond mix)

  • 60% Total US Stock Market
  • 40% Bonds (either Total Bond Market or Intermediate Term)

Coffeehouse Portfolio – Bill Schultheis
(from The Coffeehouse Investor)

  • 10% Domestic Large Cap Blend
  • 10% Domestic Large Cap Value
  • 10% Domestic Small Cap Blend
  • 10% Domestic Small Cap Value
  • 10% World Stock Market (ex-US)
  • 40% Intermediate Term Bonds
  • 10% REITs

Core Four – Rick Ferri
(from All About Asset Allocation)

  • 48% Domestic Total Stock Market
  • 24% World Total Stock Market
  • 20% Intermediate Term Bonds
  • 8% REITs

Coward’s Portfolio – William Bernstein

  • 15% Domestic Large Cap Blend
  • 10% Domestic Large Cap Value
  • 5% Domestic Small Cap Blend
  • 10% Domestic Small Cap Value
  • 5% Europe Total Stock Market
  • 5% Pacific Total Stock Market
  • 5% Emerging Markets
  • 40% Short Term
  • 5% REITs

Global Market Portfolio – Meb Faber
(This is a research based estimate of the global market’s asset allocations)

  • 20% US Stock Market
  • 15% Foreign Developed Market
  • 5% Emerging Markets
  • 22% Corporate Bonds
  • 15% 30-year Bonds
  • 16% 10-year Foreign Bonds
  • 2% TIPS
  • 5% REITs

Gone Fishin’ Portfolio – Alexander Green
(from The Gone Fishin Portfolio)

  • 15% Total US Stock Market
  • 15% US Small Caps
  • 10% Emerging Market Stocks
  • 10% European Stocks
  • 10% Pacific Stocks
  • 10% Short Term Corporate Bonds
  • 10% High Yield Bonds
  • 10% TIPS
  • 5% Gold
  • 5% REITs

Ivy Portfolio – Meb Faber
(from The Ivy Portfolio)

You definitely need the book for the intricacies of how to use this set. Worth the read.

  • 20% Domestic Total Stock Market
  • 20% World Stock Market (ex-US)
  • 20% Intermediate Term
  • 20% Commodities
  • 20% REITs

No-Brainer Portfolio – William Bernstein
(from The Intelligent Asset Allocator)

  • 25% Domestic Large Cap Blend
  • 25% Domestic Small Cap Blend
  • 25% World Total Stock Market
  • 25% Short Term Bonds

Permanent  Portfolio – Harry Browne
(from Fail Safe Investing)

  • 25% US Total Stock Market
  • 25% Long Term
  • 25% T-bills or Cash
  • 25% Gold

Risk Parity Portfolio – Meb Faber
(from Global Asset Allocation)

  • 8% US Large Cap
  • 8% Foreign Developed
  • 35% Corporate Bonds
  • 35% 10-Year Bonds
  • 5% Commodities
  • 5% Gold
  • 5% Reits

Swenson Portfolio – David Swenson
(from Unconventional Success)

  • 30% Domestic Total Stock Market
  • 15% World Stock Market (ex-US)
  • 5% Emerging Markets
  • 30% Intermediate Term Bonds
  • 20% REITs

Warren Buffett Portfolio – Warren Buffett
(from multiple interviews**)

  • 90% S&P 500
  • 10% Short Term Government Bonds

**An important piece of his recommendation is that you dollar cost average into the index. Do not buy all at once. The government bonds are a way to counter inflation vs holding cash.