September 17, 2025 • 58 mins
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Retirement investing has lost its way. While Wall Street fixates on asset growth and total return, millions of retirees struggle with a fundamental question: how do I generate reliable income without depleting my savings?
Steve Selengut, veteran investor and former RIA owner who managed $100 million in assets, challenges the industry's growth-obsessed paradigm with a refreshingly old-school approach. His investment philosophy centers on four principles largely abandoned by today's advisors: quality, diversification, income production, and systematic profit-taking.
Unlike conventional strategies that rely on selling assets during retirement (the problematic "4% rule"), Selengut's approach creates multiple income streams through dividends, interest payments, and strategic profit-taking. This methodology recognizes market cycles as opportunities rather than threats, allowing investors to average down during downturns and harvest profits during upswings.
At the heart of this strategy lies an often-overlooked investment vehicle: closed-end funds (CEFs). These actively managed portfolios trade like stocks while offering exceptional income potential—typically 7-10% yields compared to the paltry 1-3% from traditional sources. For retirees seeking monthly income without touching principal, CEFs provide a compelling alternative to conventional bond and dividend strategies.
Perhaps most importantly, Selengut demonstrates how focusing on income growth rather than market value creates a more resilient retirement plan. While portfolio values fluctuate with market conditions, properly structured income portfolios can grow their cash flow year after year, providing peace of mind regardless of market volatility.
Whether you're approaching retirement or already there, this episode challenges you to reconsider what really matters: not the size of your portfolio, but the reliable income it generates. Ready to rethink your retirement strategy? This conversation might just transform how you view investing for the rest of your life.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Steve Selengut (00:02):
I'm already having fun.
Steve Davenport (00:03):
Hey, I'm Steve Davenport here from Skeptic's
Guide to Investing and I'm withmy partner, Clem Miller, and
today we have a special guest totalk about retirement income,
Wall Street and all things inthe market that help you produce
a stream of income that you canlive on and feel comfortable
with.
(00:24):
Produce a stream of income thatyou can live on and feel
comfortable with.
Steve Selengut is anaccomplished author of American
investment and retirementinvesting income, and he's been
around this market.
He's run an RIA, sold an RIA in2023 that had about $100
(00:45):
million in assets in it, and Ithink that Steve has been around
the markets and has been aroundthis whole concept for a while.
So we're going to have to callyou Steve S versus Steve D.
But, Steve S, welcome toSkeptic's Guide to Investing.
We're glad to have you and I'dlove to hear your perspective on
(01:06):
retirement income and how toget started, because Clem and I
are both trying to figure it outand, as CFAs, we have this
theoretical view of the worldthat sometimes actually
conflicts with the actual viewof the world.
Steve Selengut (01:25):
Well, I can understand that and I've been
told that my approach is new anddifferent, when in fact it's
really old and one that reallyhad been practiced when I first
started in the investment worldand I was creating and managing
(01:50):
accounts for people and I told abroker you know, this is an old
couple, we've got to focus onincome.
So let's find some bond unittrust and Ginnie Mae type things
and individual muni bonds andstuff like that, and we'll only
(02:12):
use our normal stocks, but we'llonly use the ones that have the
higher dividends.
And that was fine with him.
He was getting commissions oneverything, he was getting
markups on the bonds and soforth.
So you know, that was all rosyand neither one of us cared
about whether the market valuewent up as fast as the Dow did
(02:34):
or something like that.
We didn't.
We just cared that the guy hadthe income he wanted and he
didn't spend it all so we couldcontinue to grow the income.
Then we went to the era wherecommissions were no longer the
way to go and everybody was likeI was getting a fee at the time
and now all of a sudden, thebrokerage firms are getting the
(02:59):
fees and I was getting a pieceof the fee, and I was getting a
piece of the fee and the wholeattitude in the investment world
changed that it doesn't reallymatter what your clients want.
(03:20):
You have to do something thatgrows the market value, the AUM,
because that's what we hiredyou to do.
You grow the AUM and you makemore money and we make more
money.
It doesn't matter if the clientmakes what he needs.
And they'd never spelled thatout in words.
They call themselvesfiduciaries and said we have
(03:40):
your best interest at heart, butof course they're the ones that
determine what your bestinterests are, instead of asking
you.
So that's where we are now inthe investment community.
We're in an AUM-focused damn.
Everything else.
The market value has got to goup, and if it doesn't go up,
(04:02):
it's not our fault.
It's because planes flew intobuildings or just a country
attacked that country or thisguy is doing tariffs.
There's always an excuse.
It's not our fault.
You know what we have you inwith the models that we've
created that are suitable to youwill get you to the end, and
(04:22):
then we'll systematically sellyour securities, probably the
losers, because we know you liketo see green and provide you
with income that way andhopefully at 4% a year.
It'll still be some of it therewhen you die.
And I say you know that'sreally BS.
(04:43):
I mean, there are a dozen thatI can name, will you?
Steve Davenport (04:49):
explain that term BS, Because we've never
heard that before.
Steve Selengut (04:52):
You've never heard that.
Where'd you guys go to school?
Steve Davenport (04:58):
It's from Georgetown, so they speak
foreign languages.
Steve Selengut (05:02):
Georgetown yeah, I would never have been able to
get into Georgetown.
Steve Davenport (05:05):
My granddaughter- I went to
Columbia and there was allengineering talk about
structures and buildings andthere was this guy Buffett in
the business school thatbelieved in granddad or
something.
Anyway.
Steve Selengut (05:19):
I'm a big fan of Buffett.
He was a quality guy.
Steve Davenport (05:24):
I'm a similar type of quality guy myself.
Steve Selengut (05:28):
Not many people talk about quality.
I have four principles Quality,diversification, income
production and profit-taking.
I think the profit-taking isnot something that either of you
guys do, because you're moregrowth orientated.
I don't just look at one streamof income.
(05:49):
I actually have two, possiblythree streams of incomes in the
portfolios that I encouragepeople to set up.
And there's the distributions,ie dividends, the profit taking
on complete positions, and thenyou get into the idea that we
(06:12):
really live in a cyclical marketenvironment.
Two cycles are particularlyimportant the interest rate
cycle and the stock market cycle, and you can determine exactly
where you are right now andwhether you're part of an upward
(06:33):
or downward moving thing, butyou have no idea where it's
going.
So you make your decisions toanticipate change.
If you're at the high of amarket, you buy less of stocks.
If you're at a high interestrate environment, you know that
the interest rate sensitivesecurities are down.
(06:55):
You buy more of them, or anormal amount at that, and then,
when they fall again, you buyless of them so that you can
average your cost on the way asit moves in the other direction.
I don't just average, I alwaystake profits when they go up.
So the third stream of incomethat I create, since I'm buying
(07:16):
on the way down.
I start with $5,000.
The market goes down, my costgoes down 10%.
I buy another month or two, Ibuy another, and so on.
Eventually the market goes backup.
Those last in, first out typethings.
(07:36):
They may go up 6%, 7%, whilethe whole position is still in
the red.
That doesn't make them any lessof a profit and in today's
environment you can sell them atthe profit.
So I developed that third streamof income.
So my focus qualitydiversification income.
(07:56):
I don't know if it's certainlynot similar to the Wall Street.
I've never in my life boughtanything that didn't pay me a
dividend.
My dad, who got his master'sdegree at Columbia, nice, and my
granddaughter is thinking aboutapplying to law school in
(08:19):
Georgetown and we'rediscouraging her because, a I
don't really want to pay for itand B she can start at South
Carolina and get her, because, aI don't really want to pay for
it and B um, she can start atSouth Carolina and get her feet
wet and then maybe transfer orsomething like that.
When she's got, she knows she'sreally going for it, but we'll
see Anyway, um, so when, when?
Steve Davenport (08:39):
I started.
Steve Selengut (08:40):
I've been talking a lot.
Steve Davenport (08:41):
I don't know if I answered any of your
questions yet no, I think we'remore on the same page than we're
on different pages.
I grew up in Boston and startedin the business at State Street
and I had a lot of old Yankeeclients who lived and died by
(09:05):
the rule of never touchprincipal.
And always, you know, you liveoff whatever income the trusts
provide, but you don't touch theprincipal.
And it seemed like a veryarchaic view at one point, but
now I start to see the wisdom ofokay, when the assets are
producing the income, and you,you know you, you should plan on
that income.
You shouldn't plan on hey, Iwant a 6% distribution and my
(09:28):
income is four, I'll just takethe six.
And you know we, we know thatthis rule has a belief that you
know these companies long-termwill go up, but you don't want
to be living off of that goingup or down.
You just want to focus on theconservative aspect of whatever
the dividend yield is.
And some of those old Yankeeideals.
(09:52):
When I moved to the South,everybody was about oh, it's
total return, it's total return,you should focus on total
return.
And then I said well, whichnames do we sell?
And so I developed a processfor individual selling where I
look at Bollinger Bands and Ilook at the 100-day moving
(10:12):
average or the 150-day movingaverage and when it's
significantly one or twostandard deviations above that
moving average, that's a signalto sell, and when it's below
that it's a signal to hold, andwhen it's below that line that's
a signal to potentially buymore.
(10:35):
So I think that in some waysyou're talking about peaks and
cycles of interest rates.
I never really focused much onthe interest rates.
I just said whatever theinterest rates are, whatever
things are in the market, is inthe price.
The market knows what theinterest rates are.
The market knows what IBM isand what Coca-Cola is.
(10:57):
So if they determine the priceto be two standard deviations
above average, they've got somereason and I don't have to
determine every reason to knowthat it's above average.
I mean, I try to keep it simple, steve.
I'm a pretty small brain so itdoesn't make sense for me to
(11:18):
make it too complicated.
Steve Selengut (11:21):
The KISS principle applies Absolutely.
Clem Miller (11:25):
Steve, yeah the KISS principle implies
Absolutely.
I was going to ask I'mintrigued by your profit-taking
methodology.
What signals do you use todetermine when to take a profit?
Steve Selengut (11:44):
I set a target for everything I own, even when
I first started, when I wasdoing stocks back in the 80s.
I started investing otherpeople's money in 79.
But I had already made my quotefortune at that time trading
high-quality dividend-payingstocks, time trading high
quality dividend paying stocks,and I always set targets and was
(12:08):
never and I was never reluctantto go back into the same stock.
I mean, my first stock I eversold was Royal Dutch, but I also
at the time I I owned all thebig names IBM, ge, general
Motors you know all the thingsin the healthcare sector and we
always we studied theirindividual sector cycles and
(12:32):
individual cycles and they'realways up and down and I saw, I
saw opportunities in thesethings that you know, up and
down swings of 10% in eachdirection often.
So I figured I said, what if Ijust set a 10% target?
(12:53):
You know I buy something.
I set a 10% target goes 10%, Isell it, I wait until it goes
down again, I buy it again.
And that's what I did.
And because of the generalupward trend of the markets, you
didn't have to wait necessarilyfor it to go down 10 to rebuy
it, because the whole marketswere in an upward trend, even
(13:18):
even the you know, for we'veonly had four major corrections
since I started and every timeit may have taken a year a
little more to get back to whereit was, but it always has
gotten back to where it has andI I don't see that changing.
We haven't had a significantrally or a correction in a while
(13:40):
, but still.
I mean, those cycles are alwaysthere.
So I always had a target when Iswitched and when I switched to
closed end funds.
And you know what?
The main reason I really wentall whole hog into closed end
funds was really on the incomeside of my portfolio, because
you guys, I'm sure, are familiarwith the, the aggravation and
(14:03):
detail and just agita of buyingindividual bonds and trying to
sell those bonds, even ifthey're up at a premium to sell
them and what your, what themarkup does to what you think
your profits are and and theaccrued interest and all that
other garbage you had to gothrough when I discovered that I
(14:23):
could go out and buy aportfolio that contained 360
different municipal bonds for 14bucks a share Whoops, sorry
about that For 14 bucks a shareand earn more in income tax
(14:44):
freefree than I could withindividual bonds.
That was really a eureka momentto me.
At that point I took, I'd say,$60 million, maybe $50 million,
of my client's money and movedthem into corporate bond,
preferred stock, municipal bond,blah, blah, blah, all the
(15:09):
different types of closed-endincome funds and by the early
90s my income focused, my incomemore than doubled for my
clients because of theclosed-end fund vehicle and I
was getting the money paidmonthly instead of every six
(15:30):
months.
I mean, give me a break.
This is the best thing sincesliced bread, did you?
Clem Miller (15:37):
Oh sorry, Go ahead.
Steve Selengut (15:38):
Yeah.
Clem Miller (15:39):
I was going to ask you how you look at the discount
.
I mean, do you always require acertain discount on the
closed-end funds?
Steve Selengut (15:46):
no, not at all.
You know, I think that's athat's, that's a wall street ism
.
Somehow they had to come upwith a way of.
Well, these are differentmutual funds.
Trade at their net asset value.
And now, of course, which etfs?
The etfs weren't even a blinkin the eye when CEF started.
(16:07):
Actually, they started beforemutual funds, and they've never,
ever, been tied to price.
The price is supply and demand.
The NAV is the value of what'sinside the trust.
So you can have interest ratesthreatening to go up.
That nav is going down for awhile, nothing's changed, but
(16:29):
it's going down just becauseinterest rate expectations have
gone up.
So, and if, if, if I still am,I still want that seven percent
that my closed-end fund ispaying and everybody else does
too.
We're not going to sell it justbecause the NAV is lower.
It doesn't matter to us,because the NAV going down
(16:51):
doesn't change the amount ofdistribution.
Those securities inside arestill paying the same interest
whether their prices are up ordown.
Nav is meaningless, it doesn'tmean a thing.
Steve Davenport (17:06):
Well, that's taking the same philosophy of
stocks, right?
We're not supposed to look atthe price today, because we're
holding it for a longer periodand if you make that one leap in
any investment you're going tomake a better return.
Because we know that turnoveris kind of the enemy of success,
right we?
Steve Selengut (17:22):
know that turnover is kind of the enemy of
success, right?
Yes, and back to the NAV thing.
Every stock has a book value.
How many stocks in themarketplace do you think trade
at their book value per share?
Very few, exactly.
And the ones that are at apremium, do we hate them because
(17:47):
they're premium?
No, they're the ones everybodywants to run into because
they're up in price, right?
So those are the most popularones, are the ones that are
selling at the biggest premiumof all.
And when people look atclosed-end funds, they say I
don't want to buy that, it's ata premium.
Well, look at Nvidia.
Look at they say I don't wantto buy that, it's at a premium.
Well, look at NVIDIA.
Look at Tesla, look at this.
Steve Davenport (18:11):
Look at that.
It's totally….
You prefer the weighingmechanism versus the voting
mechanism.
I'm sorry, the what you preferlooking at stocks and weighing
their value versus voting ontheir popularity.
Steve Selengut (18:27):
Yes, I'm trading .
I'm trading on their popularity.
Steve Davenport (18:32):
Trading on their popularity, but not
necessarily weighing your buychoices on popularity.
Steve Selengut (18:38):
No, I don't buy when they're up, I sell when
they're up and I buy whenthey're down, because I vetted
the quality, I know what theyare.
You know, if I were in thestock market and you know, the
Exxon Valdez happened, right,you guys remember that.
All that oil over the NorthPacific up there by Alaska,
(19:00):
right, what happened to ExxonPrice?
Right, I bought Exxon foralmost every one of my clients
at that point and not too longlater we had our 10% profit and
I was out.
So you know, it's the samething.
If you've got the quality andit's a known quality, quality of
(19:24):
known.
I look at closed-end funds.
I don't buy any unless they'reat least five years in business.
They've got to own at least 50different positions inside, not
30, 50, okay, they've got tohave a distribution history that
I can look at for years andhave stability.
If it's gone up or down, I candetermine why.
(19:46):
Well, it went down wheninterest rates went down, their
distributions went down, theirprice went up.
But after a series of years,just like now.
You guys know that and this isthe way a lot of people look at
the closed-end funds now.
Why are they down so much?
(20:07):
Well, before 2008,.
We had scores of years 50, 60years where 5% was low interest
rates.
What were your first mortgagesat 5% was low interest rates up
until 2008.
At the end of the financialcrisis, for whatever reason,
(20:32):
interest rates went to almostzero and stayed there for almost
12 years.
So the generation of todaywe're talking about 5% right now
has high interest rates.
Yeah, okay, so there's yourdifference right there.
Before the financial crisis,you had all these years of even
(20:54):
double digit.
I remember buying New York PortAuthority municipal bonds
yielding 12% coupon.
So you had these years andyears and years of higher
interest rates before thefinancial crisis.
And you look at any chart along closed-end fund, the chart
is up here.
(21:14):
Then the financial crisis andthen, all of a sudden, the
chart's down here and everybodysays, oh my God, look how the
price went down.
Well, that's why the price wentdown.
These are all bonds, bonds,mostly bond funds, high yielding
securities.
They can't get 10 paper anymore.
It's gone, it doesn't existanymore.
Steve Davenport (21:35):
So that's how would you compare, like a
closed-end funds to a reed,because both contain multiple
investments, both have differentcash flows and one of the
questions I've always had aboutclosed-end funds is is there a
management fee or is there sometype of overhead that we're
(21:58):
paying for that?
When we think about theclosed-end funds, we don't
necessarily attribute it like aninvestment management fee, just
like in REITs.
We don't think about themanagement of the REIT as an
expense, but it is built intothe overall yield.
Steve Selengut (22:20):
It's absolutely built in.
It's absolutely built in and itcan be as much as 2.5%, just
like in a REIT.
It can be even more, but itincludes.
I don't know if REITs useleverage or not, but closing
funds can use leverage up to 50%.
The average is about 30%, whichis lower than the average stock
(22:42):
in the New York Stock Exchange,but that's also one of the
things that go into that.
Decalculation is that.
But the yield is after expenses, after expenses.
So these things aren't allowedin 401ks, which is probably a
good thing because they don'thave the volume, but they're not
(23:06):
allowed in there because theircosts are high.
That's why Vanguard and all theother mutual funds came up with
these 0.5% fee funds so theycould be in these REITs, because
the government set that limitat over 2%.
If your fees are over 2%, youcan't hear, because the
government believes that 3%yield after low expenses is
(23:32):
better than an 8% or 10% yieldafter high expenses yield after
high expenses, you know, is thatstill?
Clem Miller (23:40):
you think that's still going to be the case now
that they're lightening up onrestrictions regarding other
things like crypto and pe and ohman, I don't know what the hell
is going well um I mean, I'mskeptical about all that stuff,
but you would think you'd thinkthey'd put it in closed-end
funds.
Um, you know if they're goingto put in all this other stuff.
Steve Selengut (23:57):
Crypto has almost an unlimited supply right
.
Clem Miller (24:00):
Ultimately it does.
Steve Selengut (24:02):
Yeah, closed-end funds are different.
They're fixed theoretically.
A limited number of shares areout there.
If they were to put thosehundreds of billions of that
type of money in there, theprices of those things would get
their yields down to the pointwhere they aren't split unless
(24:22):
they somehow they don't dosplits, they do reverse splits
they do.
They can do rights offerings.
So you'd probably see somepretty hefty rights offerings
going on.
But I mean, if you were to takehard to say you say I don't
know how long the pleasure ofclosed-end funds as long as
(24:46):
they're a mystery to most people, they're a wonderful, wonderful
source of income, then it's awhole different ballgame and
they may have to reinvent howthey set up their IPOs and how
many shares they can, if theycan add shares over time.
(25:09):
It's a question I hope I don'thave to answer for my advisees
and people now.
I don't know.
Steve Davenport (25:20):
Tell us how long you're going to be around
and then we'll know how longCEFs are going to last.
Okay, Because it sounds likeyou're a pretty strong supporter
.
Steve Selengut (25:30):
Oh, I'm a strong supporter and I've got a lot of
strong supporters, I'vedeveloped a lot of strong
supporters of them, but you knowthey're not popular.
Where it counts, I mean theadvisory services, the advisors
themselves.
I mean you can call up and askthem and some will not even know
(25:50):
what you're talking about.
I use LinkedIn and I put inI'll put in a fidelity screen
(26:10):
that shows the projected annualincome on a portfolio of
$400,000.
And even though it showsfidelity, I won't get anybody
saying how'd you do that?
Or how does he do that, howcome?
Why, what's in there, you know?
Or how big is that portfolio?
That's got to be a $10 millionportfolio.
It's not.
Steve Davenport (26:31):
I think there are some people who worry about
the closed nature andunderstanding everything that
goes on underneath.
Right, I think that I can.
I mean, when I think aboutinvesting, I think about this
thing kind of I call it themessy middle.
And it's where you've got thebonds over here that you're
pretty sure you understand,because they're pretty high
quality.
Corporates and governments getinto what I'll call equity-like
(26:58):
vehicles, such as REITs, such aspreferreds, such as
convertibles, such as munis andthings that have characteristics
that are slightly differentthan these riskless bonds.
And so when I look at yourclosed-end funds and I think
about them, when I look at yourclosed-end funds and I think
(27:18):
about them, where do you thinkthey fit on that continuum of
risk and return?
I know they're high on thereturn side, but we must be
taking some theoretical risk inorder to get that it feels like
(27:38):
it's illiquidity because thesethings are so lightly traded.
Steve Selengut (27:41):
Yeah, okay, the illiquidity is not something.
It rarely impacts your trading,even as heavily as I trade.
And now I've got 550 people inmy RMS community and they're
trading, and very rarely do yousay anybody say hey, I was told
(28:02):
I couldn't, I couldn't tradethat anymore, or I wasn't able
to sell this because there areno buyers, or I wasn't able to
buy it because there's nosellers.
Steve Davenport (28:10):
You just don't get that in the communications
yet, right well, I think Iremember in march of 2020, when
everybody was saying the munimarket is shut down and
therefore, you know, I want tosell my munis, to buy the market
that's corrected and I I can'tget a price on my munis or I
(28:32):
can't get a good price on, andso I don't think the average day
I agree with.
On average, if I can be patient, as you said, most investments
will overcome this illiquidity.
But the question is is therestill going to be a moment when
you don't want, when I want, toget out and buy some of those
(28:55):
stocks that have corrected that?
We will?
You know, were there problemsin 2020?
Were there problems in 2011?
Were there problems in 2008?
Steve Selengut (29:06):
There was never any problems trading the
closed-end muni bond funds.
I can understand why theindividual bonds might have had
some trading difficulties,because they are individual
transactions between you and me.
I've got a piece of paper forsale.
You want to buy it from me andwe have to agree on a price, but
(29:30):
closed-end funds trade likestocks and but but all my point
is is that they they did go downduring those.
But the stock, they were stocksand they they are not impacted
by the same thing that impactsthe securities inside them.
When you sell a municipalclosed end fund, you're not
(29:51):
selling the municipal bonds,you're selling a stock in the
trust that holds those municipalbonds, so you don't have those
kinds of liquidity problems.
And the same with preferredstocks.
When I was growing up investingand I had individual preferred
stocks for people, yeah, therewere times where they were tough
(30:11):
to buy and sell, but when youhave a portfolio of them in a
closed-end funds they're justlike that.
Clem Miller (30:19):
It's never, never a problem never do you look at
yield also as a valuationindicator?
Steve Selengut (30:30):
that's a valuation, not really because
interest.
If you study interest ratesensitivity and just when you
see yesterday what was the news,you know, the interest rates
just went up again, or theyields just went up because all
the prices went down, becausethey're now concerned that
(30:51):
interest rates are not going tobe cut, maybe in September.
So the whole little ups we hadbefore that, or downs in yield,
ups in price, just reverseditself in one day because it got
some news came out that saidthey may not be able to lower
interest rates.
Frankly, I don't think theyshould be lowering interest
rates in this environment either.
(31:13):
But you do have that volatilitywhich is always a buying
opportunity.
How do you spell correction?
O-p-p-o-r, you know, et cetera.
You know, really, I mean onething as an investor that you
got to learn and that you haveto coach your clients in as an
(31:36):
advisor is that there has never,ever been a correction that
didn't, that wasn't replaced bya rally, and vice versa right,
don't get so go ahead oh sorry.
Clem Miller (31:50):
And how do you look at um quality?
Why?
How do you what?
How do you define quality in inyour world?
Steve Selengut (31:58):
well my world used to be when I was buying
stocks.
They had to be profitablecompanies that paid dividends.
The dividends at that time werefor two reasons.
One, they respected theirshareholders enough to pay them
something, and paying dividendindicated that they were
profitable, that they had moneyto give them.
Paying dividend indicated thatthey were profitable, that they
had money to give them, and ifthey ever cut a dividend, you
(32:22):
knew that that was the time toget out of that company, Because
they don't want to ever do that.
It's got to be a really problemfor them to cut a dividend.
So there were two reasons and Ialways had diversified.
Diversification was a big thing.
I used to look at PE ratios andI used to look at
(32:42):
debt-to-equity ratios and theyhad to be reasonable.
Do you know what the PE ratiois on the Dow Jones Industrial
Averages today?
Clem Miller (32:51):
No.
Steve Selengut (32:52):
And do you remember what it was back in the
80s?
Clem Miller (32:56):
Yeah.
Steve Selengut (32:56):
Like seven right .
Clem Miller (32:58):
Yeah.
Steve Selengut (33:03):
In the 80s, yeah like seven right yeah in these
and a zero.
Clem Miller (33:05):
It's really no like 40, something like 40 to 1 now.
Well, the Dow has, as the Dowalso has, changed its
constituents as well as becomeabsolute more growth II more
growth II.
Steve Selengut (33:16):
Yep, they even have things that don't pay
dividends there now.
And look at how the S&P haschanged.
The S&P is almost a mini NASDAQNot quite, not quite, but how
many days do you see?
The Dow is up or down andNASDAQ and S&P are the opposite.
You know the NASDAQ's alwaysbeen that way, but the S&P has
(33:38):
changed a lot.
Steve Davenport (33:40):
So, steve, let's get down to brass tacks.
We've got an investor who wantsto be 70% equity, 30% bonds at
an overall asset allocationlevel.
How do you, where do you?
Do you put 70% into closed-endfunds?
Do you put 30% into closed-endfunds and skip the fixed income
(34:07):
Closed-end funds?
Steve Selengut (34:08):
are fixed.
Closed-end funds are fixedincome.
There are in the universe I usefor closed-end funds.
There's over 110 fixed income,ie anything that has less than
35% in the stock market.
In these closed-end funds Iconsider an income fund.
(34:29):
Anything more than 35% in thestock market is my equity bucket
, anything more than 35% in thestock market is my equity bucket
and I have roughly 110 in theincome and about 100 equity.
Different closed-end funds andthey're all different types,
(34:54):
from short-term to intermediateto long-term, to higher quality
to marginally lower quality,global.
You know, in the muni bond youhave all the different, like 12
different states that haveindividual state bonds and the
regular ones that haveeverything.
So, to diversify and yeah, Iput it all in there because it's
so much easier to you can tradethem.
It's not like an individualbond where, like you said, in
(35:16):
2020, you couldn't sell amunicipal bond.
I didn't have that problem.
So yeah, I do.
However, there are other incomesecurities.
There are REITs, which I usedto do in the old days, and they
are contained in many closed-endfunds.
(35:38):
There are BDCs same thingscontained in a few CEFs and
several or many ETFs.
There are CLOs contained insome CEFs and in ETFs, preferred
stocks same thing both types.
So for my larger, anybody withyou know they got to have seven
(36:04):
figures, million and a half ormore.
Yeah, you can go ahead and put alittle bit into those ETFs that
are in BDCs or CLOs and getaway with it, recognize that
they're more risky than theclosed-end funds and so on.
So, yeah, I use all the varioustypes of securities, but I
(36:26):
don't do them as individualentities anymore.
I need the safety of the fund.
You know the very principlethat brought mutual funds into
popularity, that allowed theaverage guy to participate in
the growth of the economywithout trying to select stocks,
(36:49):
because it was all managed anddone for him.
The same thing that createdthat popularity is pretty much
what I'm saying now.
In the form of CEFs, Iparticipate.
I own 100 different equityclosed-end funds with an average
of over 200 positions in each.
(37:11):
I own every stock you canimagine.
I own the Magnificent Seven andmy average cost per share is
less than $20, and I owneverything.
I think that makes me feel verycomfortable and confident that
I'm participating in the economytotally without having to
(37:36):
select the next winner or worrya bit.
Steve Davenport (37:39):
stuff like that Were you only bank seven, then
what CEF would have that All?
Steve Selengut (37:45):
the CEFs, all the equity CEFs, have some of
them in it.
Some of those CEFs probablyhave all of them.
Clem Miller (37:55):
Why would you need so many CEFs in your portfolio?
Steve Selengut (38:00):
There's two reasons.
There's two reasons.
As an advisor, when I wasmanaging money for people, I
told them that I would never,ever put them in any security
that I didn't own myself.
Fortunately, I had the assetsthat I could make that statement
and hold true to it.
So I wanted them to know Iwasn't just selling them stuff
(38:30):
that somebody suggested to mewas good and that I wouldn't
touch it myself.
Same thing goes with when Iswitched over to closed-end
funds and I had them all becauseI was diversified in all my
portfolios.
And when you start looking atmultiple streams of income, I'm
not looking for a big winner,I'm not looking to grow my
(38:53):
market value, I want to grow myincome.
And the way I do that is withprofit taking.
And if you look at the, if youstudy the market, you know some
years the healthcare industry isthe hero, sometimes it's the
oil industry, right now it's IA,you know.
So it's always somebody that'sgoing up and somebody that's
(39:17):
going down.
I always want to own somethingthat's going up.
So what I do with theclosed-end funds is I own them
all.
I take profits on them ratherquickly, faster than most people
would Rather quickly, fasterthan most people would.
I have an average.
The average yield on myportfolios in the equity and
(39:40):
income is a little less in theequity than the income, but
roughly an average of 10% acrossthe board.
So when I look at one of mysecurities that thing is paying
(40:06):
me three quarters of 1% a month.
Okay, so if I find a lotsomewhere where the lot itself
is up one and a half percent, Isay wait a minute, that's two
months income.
I just bought that thing fivedays ago and it's up, you know,
and I can make two months incomeon it.
I'll do it, you know.
So if you manage your portfoliothat way, you keep generating.
That same capital can bereinvested again and again and
(40:27):
again.
Right environment, anenvironment simply where you go
up three or four days in a row,you're going to have these
profit-taking opportunities,even though the entire position
isn't in the green.
You have this other stream ofincome from the tax lots.
This couldn't be done back inthe 80s or the 90s or even even
(40:53):
up through 2012, because youdidn't have the technology.
But today you open up fidelity,you can see everything that
you've bought for you know yeah,do you um?
Clem Miller (41:04):
do you keep a uh significant cash position or do
you stay fully invested?
Steve Selengut (41:09):
I stay fully invested or except for, you know
, right now I have a large sumof cash to pay my taxes, but you
know.
So out of each monthlydistributions, if I have
upcoming expenses, I'll set asum aside.
But I just have a reserve.
I don't try to time the marketat all because my yields are so
high and some of the people inthe community call it blizzards
(41:38):
blizzards of money coming in atthe end, first day and last day
of the month from thedistributions on all these
things that you pretty muchalways have cash to take
advantage of.
Some things that go down, stufflike that.
Clem Miller (41:53):
Do we need to worry at all about the leverage
that's in this?
I mean, how did these things doin 2008?
Steve Selengut (42:01):
They were fine.
In fact, as we came out of that, we did even finer because
interest rates went down.
So these guys are managers.
Leverage isn't something that'sautomatic.
You know you make a decision.
I can borrow money just likeyou would in your own life.
You know I can borrow money at2%.
(42:25):
Why would I pay that $100,000for a Mercedes if I can borrow
this at 2% and buy that?
Sucker you know, you know,that's the type of
decision-making they make too.
Clem Miller (42:40):
Do you study the managers as well?
Steve Selengut (42:43):
I study the providers, like if it's
BlackRock or Nuveen or you knowthose types of names.
I don't worry If I see a namethat I'm not familiar with, like
the first time I went with,let's say, doubleline.
The first time I saw one oftheir closed-end funds, I'd
(43:05):
studied it pretty carefully andlooked around at all the past
and everything, and I do thatevery month anyway with all of
them.
But yeah, there are about 45financial institutions Most of
them you'd know their names thatproduce closed-end funds.
The biggest names are Nuveenand BlackRock and PIMCO, and
(43:32):
PIMCO.
Steve Davenport (43:33):
So when you look at these the
cross-ownership of the sameclosed-end funds in Nuveen Fund
1 and BlackRock Fund 2, does itbother you?
Do you ever aggregate acrossthe different funds to determine
what is your biggest closed-endfund that's held by?
Steve Selengut (43:54):
these your biggest closed-end fund, that's
held by these?
Steve Davenport (44:00):
Do you aggregate all of the underlying
holdings and get a perspectiveof your?
Steve Selengut (44:04):
overall holding, absolutely.
Did you see that symbol thatwas up before my face came up on
the screen, that pyramid, yeah,the pyramid You're familiar
with the risk pyramid.
Steve Davenport (44:17):
Yeah, a little bit.
Steve Selengut (44:18):
Okay, so there are about 40 different types, 42
, 43 different types ofclosed-end funds that we've
identified and we've segregatedthat into eight floors of a
pyramid, and the four bottomfloors are the fixed income
(44:39):
investments, with government and, and you know, state municipal
bonds on the bottom, so to speak, and then the first equities
appear on the fifth floor.
On the fifth floor and then wayup there on the top floor are
things like REITs, not REITs,MLPs and things like that, not
(45:03):
REITs.
Okay, is that?
I prepare for the people in mycommunity.
Every security has the riskpyramid level associated with it
, so they can actually bynumbers determine.
Steve Davenport (45:25):
You know, they know that all their bonds are
less risky than all their stocks, so even a bond fund that might
be using leverage.
All of the municipal bond fundsuse leverage.
Leverages there must be somethat use more than others.
Steve Selengut (45:43):
The maximum allowed is 50%.
Okay, the average usage is lessthan 30%, which is like I said
before.
I think when we were talkingearlier, that 30% is less than
your average company on the NewYork Stock Exchange.
Steve Davenport (46:05):
So how would a muni bond that's using 50%
leverage compare to an equityclosed-end fund that's using 20.
Steve Selengut (46:18):
In what way?
In risk.
Steve Davenport (46:19):
It's much less risk when you just spend the
first four levels of fixedincome and then you put the
equities on top Right.
I just told you a muni bond isa 50% Right.
So you're saying that one ofthe equity guys can move down
into the four bottom layers.
Steve Selengut (46:37):
No, no, they can't.
Equities are always more.
Stocks are always more riskythan bonds when a company goes
bankrupt who gets paid out?
Steve Davenport (46:47):
I just asked you when you said that the muni
bond was riskier, didn't you?
No, no, no, never.
The muni bond was riskier,didn't it?
No, no, no, never.
So they're using 50% leverageand they're less risk than the
equity guy who's using 20%leverage.
Steve Selengut (47:01):
Yes, less financial risk.
We're not talking about marketvalue risk, we're talking about
financial risk.
The risk of total loss of yourmoney is always greater in an
equity position than it is in abond position, always when a
(47:22):
company goes under.
Steve Davenport (47:24):
A yield bond is going to be less risky or more
risky than an equity that haslow leverage in a closed-end
fund.
Less risky.
Steve Selengut (47:39):
A bond is always less risky than the same
company's stock.
Steve Davenport (47:44):
It's higher up on the capital structure, it's
higher up on the capitalstructure, I know, but if the
capital structure of a companyis poor, and they're borrowing
more than they should then theycould be more risky than the
bond that you're saying has abetter capital structure but a
worse company.
Steve Selengut (48:02):
If the company goes out of business, it has to
pay the bondholders first, evenif they are high-yield bonds.
And they can't even pay anotherdividend to their shareholders
until they pay the interest.
Steve Davenport (48:15):
I'm not asking you within the same security, oh
okay, no, and across differentsecurities.
Okay, yes, so that's what I'msaying your pyramid, that middle
level of your pyramid, I'm notsure how you go from the lowest
risk equity to the highest riskequity fixed income, when in
reality you could have-.
Steve Selengut (48:36):
There are one or two closed-end funds high yield
global.
That would be up there with thebottom tier of the equities.
So yeah there may be two orthree that infiltrate up.
Just like when I use ETFs, Iconsider them all riskier, but
(48:59):
there are ETFs that just investin closed-end funds, so they're
lower in risk to me.
Clem Miller (49:06):
But yes, I see your point.
Steve Selengut (49:08):
You're absolutely right.
A high-yield global CEF wouldbe more risky, probably, than
the stock of a company likeExxon.
Steve Davenport (49:22):
Yeah, I'm just saying there are cases where
people manage their equity soconservatively to generate
income selling call options, andso I pursued with people who
wanted to own some of thesethings and ETFs, and then I
would write calls against thoseETFs, and so one of the things
(49:45):
we did was, you know, at onetime J&J call options had a
volatility of 8%.
Now the overall risk of themarket is 15.
And how do you get a corporatethat has that lower risk Because
their balance sheet quality isstill AAA.
Steve Selengut (50:05):
So good yeah.
Steve Davenport (50:06):
Right, and so all I'm saying is there can be
cases where equities willpresent as having less risk, and
I guess I'm just trying tounderstand where they're going.
Well, the highest Things don'tall.
I love charts that sayeverything fits in this diagram,
and then you say well, there'ssome uncertainty between this
(50:31):
level and this level.
Steve Selengut (50:33):
I absolutely agree.
I didn't mean to make it saythat it's an absolute.
There are no absolutes, you'reright, I totally agree with you.
But the thing that is mostinteresting is that when you
have this broad diversificationthat I encourage you know I'm
(50:57):
talking mainly to six-figureinvestors and so on that I
encourage investors to own themall is because there always
seems to be something that youcan take a profit on when you
own that diverse portfolio, beit equity or fixed income.
Steve Davenport (51:18):
Yeah, I mean I like the fact that you're
constantly monitoring and tryingto take advantage of some of
those moves.
I like the fact that you'retrying to look at the right
managers to make sure they'reassembling good holdings
underneath it.
I like your approach, steve.
I think it's worth considering.
I guess the place that I havethe problem is can I go 100%
(51:42):
with an account in this, and Iagree that you're going to
pretty extensive diversification.
I see the benefit of having a10% yield.
I guess I'm trying to determinewhat's your overall return for
the last 10 years or the last 20years or some, for a strategy
(52:04):
like this.
Steve Selengut (52:13):
Well, a strategy like this has grown the working
capital every quarter, everyyear.
Working capital, which meansthe amount you have invested in
your portfolio and the income itproduces, are growing every
year.
My projected 12-month income isgrowing every quarter, every
year.
Now the market value is goingto vary.
(52:34):
Interest rates go up.
The market value is going tovary.
Interest rates go up, my marketvalue is going down.
There's no doubt about it.
The stock market may still begoing up.
The stock market is going upand interest rates are stable or
going down.
I'm going to be at an all timemarket value high too, but I'm
not going to have exponentialgains in return because I'm
(52:54):
clipping my profits andinvesting in things that are
down.
I'm happy seeing more red on mystatement than green, and
particularly in the environmentwe've had this year, for example
, with the relatively smoothcross pattern.
(53:15):
We haven't had huge.
We have one significant down,but no real huge ups.
I mean the Dow hitting thatall-time high the other day, on
August 22nd and 28th.
Those are the only twoall-times highs it's hit all
(53:37):
year.
Right now, today, it's aroundwhere it was last December, last
November.
So we're in a rally that's beenpushed by the Magnificent Seven
in my mind, and certainly notby the overall.
The Russell is a good indicator, in a sense, of the overall
(54:01):
economy because it's so manycompanies and they're all small
cap.
It's where it was five yearsago, you know.
So we're in a rally that's beenfueled pretty much by AI.
Steve Davenport (54:16):
Yeah, all right , I'd like to give everybody a
last chance to have any commentsor questions.
Clem Miller (54:24):
I don't have any.
I would just say, steve, that Ithought this was a fantastic
discussion and I believe weshould try to have you back to
discuss even more.
Steve Selengut (54:34):
That'd be great.
I'd like that.
Maybe we can look at somenumbers the next time.
Steve Davenport (54:40):
Yeah, yeah, I mean, do you want to say
anything to our investors, likewe're trying to improve the
investment IQ of people wholisten, do you?
Have any suggestions in termsof.
Steve Selengut (54:52):
Oh no, any suggestions in terms of oh no.
I think it's great the way youdiscussed and and get into it,
get into the you know thenitty-gritty with your, with
your guests.
I think that's fine, I think.
I think you pointed out to mehow I expressed something
created an assumption that Ireally didn't want to create.
It was just categorization.
It wasn wasn't a distinctive.
(55:14):
You know everyone suits that,but that was great.
But yeah, I think people shouldgive the income-focused
approach a look, because thereare many within ETFs and CEFs
just a small number of ETFs, alarge number of CEFs.
(55:35):
There are ways to generatesignificant income, particularly
with a retirement portfolio.
That isn't being suggested toyou by most advisory firms.
Steve Davenport (55:52):
I think you made a lot of good points.
I like the use of some of thesestrategies.
I believe that income frombonds is not risk-free.
We need to understand that.
We need to understand that theUS government and how they
manage their own balance sheetcan create risk, just like any
(56:12):
other business can create riskwith too much debt.
So I agree with a lot of yourpremises and I like the fact
that I don't like to have aduration that's too long, and so
if my income came from some ofthese vehicles, I think they
would be additive to the overallrisk and return spectrum for
(56:35):
our clients.
I appreciate it.
I agree they would be Okay.
Thanks for joining us and Iappreciate any.
Let's try to do it again soon.
All Skeptics, investors, pleasecheck out Steve and some of his
ideas.
We're going to have a link onour transcripts that you can
(56:59):
look at some of the stuff, and Ithink it's worthwhile to always
think outside the box, becausethe box the market participants,
particularly the street, putsyou in sometimes isn't the right
box.
So thanks everybody.
Have a great day.
I'm already having fun.
Steve Davenport (00:03):
Hey, I'm Steve Davenport here from Skeptic's
Guide to Investing and I'm withmy partner, Clem Miller, and
today we have a special guest totalk about retirement income,
Wall Street and all things inthe market that help you produce
a stream of income that you canlive on and feel comfortable
with.
(00:24):
Produce a stream of income thatyou can live on and feel
comfortable with.
Steve Selengut is anaccomplished author of American
investment and retirementinvesting income, and he's been
around this market.
He's run an RIA, sold an RIA in2023 that had about $100
(00:45):
million in assets in it, and Ithink that Steve has been around
the markets and has been aroundthis whole concept for a while.
So we're going to have to callyou Steve S versus Steve D.
But, Steve S, welcome toSkeptic's Guide to Investing.
We're glad to have you and I'dlove to hear your perspective on
(01:06):
retirement income and how toget started, because Clem and I
are both trying to figure it outand, as CFAs, we have this
theoretical view of the worldthat sometimes actually
conflicts with the actual viewof the world.
Steve Selengut (01:25):
Well, I can understand that and I've been
told that my approach is new anddifferent, when in fact it's
really old and one that reallyhad been practiced when I first
started in the investment worldand I was creating and managing
(01:50):
accounts for people and I told abroker you know, this is an old
couple, we've got to focus onincome.
So let's find some bond unittrust and Ginnie Mae type things
and individual muni bonds andstuff like that, and we'll only
(02:12):
use our normal stocks, but we'llonly use the ones that have the
higher dividends.
And that was fine with him.
He was getting commissions oneverything, he was getting
markups on the bonds and soforth.
So you know, that was all rosyand neither one of us cared
about whether the market valuewent up as fast as the Dow did
(02:34):
or something like that.
We didn't.
We just cared that the guy hadthe income he wanted and he
didn't spend it all so we couldcontinue to grow the income.
Then we went to the era wherecommissions were no longer the
way to go and everybody was likeI was getting a fee at the time
and now all of a sudden, thebrokerage firms are getting the
(02:59):
fees and I was getting a pieceof the fee, and I was getting a
piece of the fee and the wholeattitude in the investment world
changed that it doesn't reallymatter what your clients want.
(03:20):
You have to do something thatgrows the market value, the AUM,
because that's what we hiredyou to do.
You grow the AUM and you makemore money and we make more
money.
It doesn't matter if the clientmakes what he needs.
And they'd never spelled thatout in words.
They call themselvesfiduciaries and said we have
(03:40):
your best interest at heart, butof course they're the ones that
determine what your bestinterests are, instead of asking
you.
So that's where we are now inthe investment community.
We're in an AUM-focused damn.
Everything else.
The market value has got to goup, and if it doesn't go up,
(04:02):
it's not our fault.
It's because planes flew intobuildings or just a country
attacked that country or thisguy is doing tariffs.
There's always an excuse.
It's not our fault.
You know what we have you inwith the models that we've
created that are suitable to youwill get you to the end, and
(04:22):
then we'll systematically sellyour securities, probably the
losers, because we know you liketo see green and provide you
with income that way andhopefully at 4% a year.
It'll still be some of it therewhen you die.
And I say you know that'sreally BS.
(04:43):
I mean, there are a dozen thatI can name, will you?
Steve Davenport (04:49):
explain that term BS, Because we've never
heard that before.
Steve Selengut (04:52):
You've never heard that.
Where'd you guys go to school?
Steve Davenport (04:58):
It's from Georgetown, so they speak
foreign languages.
Steve Selengut (05:02):
Georgetown yeah, I would never have been able to
get into Georgetown.
Steve Davenport (05:05):
My granddaughter- I went to
Columbia and there was allengineering talk about
structures and buildings andthere was this guy Buffett in
the business school thatbelieved in granddad or
something.
Anyway.
Steve Selengut (05:19):
I'm a big fan of Buffett.
He was a quality guy.
Steve Davenport (05:24):
I'm a similar type of quality guy myself.
Steve Selengut (05:28):
Not many people talk about quality.
I have four principles Quality,diversification, income
production and profit-taking.
I think the profit-taking isnot something that either of you
guys do, because you're moregrowth orientated.
I don't just look at one streamof income.
(05:49):
I actually have two, possiblythree streams of incomes in the
portfolios that I encouragepeople to set up.
And there's the distributions,ie dividends, the profit taking
on complete positions, and thenyou get into the idea that we
(06:12):
really live in a cyclical marketenvironment.
Two cycles are particularlyimportant the interest rate
cycle and the stock market cycle, and you can determine exactly
where you are right now andwhether you're part of an upward
(06:33):
or downward moving thing, butyou have no idea where it's
going.
So you make your decisions toanticipate change.
If you're at the high of amarket, you buy less of stocks.
If you're at a high interestrate environment, you know that
the interest rate sensitivesecurities are down.
(06:55):
You buy more of them, or anormal amount at that, and then,
when they fall again, you buyless of them so that you can
average your cost on the way asit moves in the other direction.
I don't just average, I alwaystake profits when they go up.
So the third stream of incomethat I create, since I'm buying
(07:16):
on the way down.
I start with $5,000.
The market goes down, my costgoes down 10%.
I buy another month or two, Ibuy another, and so on.
Eventually the market goes backup.
Those last in, first out typethings.
(07:36):
They may go up 6%, 7%, whilethe whole position is still in
the red.
That doesn't make them any lessof a profit and in today's
environment you can sell them atthe profit.
So I developed that third streamof income.
So my focus qualitydiversification income.
(07:56):
I don't know if it's certainlynot similar to the Wall Street.
I've never in my life boughtanything that didn't pay me a
dividend.
My dad, who got his master'sdegree at Columbia, nice, and my
granddaughter is thinking aboutapplying to law school in
(08:19):
Georgetown and we'rediscouraging her because, a I
don't really want to pay for itand B she can start at South
Carolina and get her, because, aI don't really want to pay for
it and B um, she can start atSouth Carolina and get her feet
wet and then maybe transfer orsomething like that.
When she's got, she knows she'sreally going for it, but we'll
see Anyway, um, so when, when?
Steve Davenport (08:39):
I started.
Steve Selengut (08:40):
I've been talking a lot.
Steve Davenport (08:41):
I don't know if I answered any of your
questions yet no, I think we'remore on the same page than we're
on different pages.
I grew up in Boston and startedin the business at State Street
and I had a lot of old Yankeeclients who lived and died by
(09:05):
the rule of never touchprincipal.
And always, you know, you liveoff whatever income the trusts
provide, but you don't touch theprincipal.
And it seemed like a veryarchaic view at one point, but
now I start to see the wisdom ofokay, when the assets are
producing the income, and you,you know you, you should plan on
that income.
You shouldn't plan on hey, Iwant a 6% distribution and my
(09:28):
income is four, I'll just takethe six.
And you know we, we know thatthis rule has a belief that you
know these companies long-termwill go up, but you don't want
to be living off of that goingup or down.
You just want to focus on theconservative aspect of whatever
the dividend yield is.
And some of those old Yankeeideals.
(09:52):
When I moved to the South,everybody was about oh, it's
total return, it's total return,you should focus on total
return.
And then I said well, whichnames do we sell?
And so I developed a processfor individual selling where I
look at Bollinger Bands and Ilook at the 100-day moving
(10:12):
average or the 150-day movingaverage and when it's
significantly one or twostandard deviations above that
moving average, that's a signalto sell, and when it's below
that it's a signal to hold, andwhen it's below that line that's
a signal to potentially buymore.
(10:35):
So I think that in some waysyou're talking about peaks and
cycles of interest rates.
I never really focused much onthe interest rates.
I just said whatever theinterest rates are, whatever
things are in the market, is inthe price.
The market knows what theinterest rates are.
The market knows what IBM isand what Coca-Cola is.
(10:57):
So if they determine the priceto be two standard deviations
above average, they've got somereason and I don't have to
determine every reason to knowthat it's above average.
I mean, I try to keep it simple, steve.
I'm a pretty small brain so itdoesn't make sense for me to
(11:18):
make it too complicated.
Steve Selengut (11:21):
The KISS principle applies Absolutely.
Clem Miller (11:25):
Steve, yeah the KISS principle implies
Absolutely.
I was going to ask I'mintrigued by your profit-taking
methodology.
What signals do you use todetermine when to take a profit?
Steve Selengut (11:44):
I set a target for everything I own, even when
I first started, when I wasdoing stocks back in the 80s.
I started investing otherpeople's money in 79.
But I had already made my quotefortune at that time trading
high-quality dividend-payingstocks, time trading high
quality dividend paying stocks,and I always set targets and was
(12:08):
never and I was never reluctantto go back into the same stock.
I mean, my first stock I eversold was Royal Dutch, but I also
at the time I I owned all thebig names IBM, ge, general
Motors you know all the thingsin the healthcare sector and we
always we studied theirindividual sector cycles and
(12:32):
individual cycles and they'realways up and down and I saw, I
saw opportunities in thesethings that you know, up and
down swings of 10% in eachdirection often.
So I figured I said, what if Ijust set a 10% target?
(12:53):
You know I buy something.
I set a 10% target goes 10%, Isell it, I wait until it goes
down again, I buy it again.
And that's what I did.
And because of the generalupward trend of the markets, you
didn't have to wait necessarilyfor it to go down 10 to rebuy
it, because the whole marketswere in an upward trend, even
(13:18):
even the you know, for we'veonly had four major corrections
since I started and every timeit may have taken a year a
little more to get back to whereit was, but it always has
gotten back to where it has andI I don't see that changing.
We haven't had a significantrally or a correction in a while
(13:40):
, but still.
I mean, those cycles are alwaysthere.
So I always had a target when Iswitched and when I switched to
closed end funds.
And you know what?
The main reason I really wentall whole hog into closed end
funds was really on the incomeside of my portfolio, because
you guys, I'm sure, are familiarwith the, the aggravation and
(14:03):
detail and just agita of buyingindividual bonds and trying to
sell those bonds, even ifthey're up at a premium to sell
them and what your, what themarkup does to what you think
your profits are and and theaccrued interest and all that
other garbage you had to gothrough when I discovered that I
(14:23):
could go out and buy aportfolio that contained 360
different municipal bonds for 14bucks a share Whoops, sorry
about that For 14 bucks a shareand earn more in income tax
(14:44):
freefree than I could withindividual bonds.
That was really a eureka momentto me.
At that point I took, I'd say,$60 million, maybe $50 million,
of my client's money and movedthem into corporate bond,
preferred stock, municipal bond,blah, blah, blah, all the
(15:09):
different types of closed-endincome funds and by the early
90s my income focused, my incomemore than doubled for my
clients because of theclosed-end fund vehicle and I
was getting the money paidmonthly instead of every six
(15:30):
months.
I mean, give me a break.
This is the best thing sincesliced bread, did you?
Clem Miller (15:37):
Oh sorry, Go ahead.
Steve Selengut (15:38):
Yeah.
Clem Miller (15:39):
I was going to ask you how you look at the discount
.
I mean, do you always require acertain discount on the
closed-end funds?
Steve Selengut (15:46):
no, not at all.
You know, I think that's athat's, that's a wall street ism
.
Somehow they had to come upwith a way of.
Well, these are differentmutual funds.
Trade at their net asset value.
And now, of course, which etfs?
The etfs weren't even a blinkin the eye when CEF started.
(16:07):
Actually, they started beforemutual funds, and they've never,
ever, been tied to price.
The price is supply and demand.
The NAV is the value of what'sinside the trust.
So you can have interest ratesthreatening to go up.
That nav is going down for awhile, nothing's changed, but
(16:29):
it's going down just becauseinterest rate expectations have
gone up.
So, and if, if, if I still am,I still want that seven percent
that my closed-end fund ispaying and everybody else does
too.
We're not going to sell it justbecause the NAV is lower.
It doesn't matter to us,because the NAV going down
(16:51):
doesn't change the amount ofdistribution.
Those securities inside arestill paying the same interest
whether their prices are up ordown.
Nav is meaningless, it doesn'tmean a thing.
Steve Davenport (17:06):
Well, that's taking the same philosophy of
stocks, right?
We're not supposed to look atthe price today, because we're
holding it for a longer periodand if you make that one leap in
any investment you're going tomake a better return.
Because we know that turnoveris kind of the enemy of success,
right we?
Steve Selengut (17:22):
know that turnover is kind of the enemy of
success, right?
Yes, and back to the NAV thing.
Every stock has a book value.
How many stocks in themarketplace do you think trade
at their book value per share?
Very few, exactly.
And the ones that are at apremium, do we hate them because
(17:47):
they're premium?
No, they're the ones everybodywants to run into because
they're up in price, right?
So those are the most popularones, are the ones that are
selling at the biggest premiumof all.
And when people look atclosed-end funds, they say I
don't want to buy that, it's ata premium.
Well, look at Nvidia.
Look at they say I don't wantto buy that, it's at a premium.
Well, look at NVIDIA.
Look at Tesla, look at this.
Steve Davenport (18:11):
Look at that.
It's totally….
You prefer the weighingmechanism versus the voting
mechanism.
I'm sorry, the what you preferlooking at stocks and weighing
their value versus voting ontheir popularity.
Steve Selengut (18:27):
Yes, I'm trading .
I'm trading on their popularity.
Steve Davenport (18:32):
Trading on their popularity, but not
necessarily weighing your buychoices on popularity.
Steve Selengut (18:38):
No, I don't buy when they're up, I sell when
they're up and I buy whenthey're down, because I vetted
the quality, I know what theyare.
You know, if I were in thestock market and you know, the
Exxon Valdez happened, right,you guys remember that.
All that oil over the NorthPacific up there by Alaska,
(19:00):
right, what happened to ExxonPrice?
Right, I bought Exxon foralmost every one of my clients
at that point and not too longlater we had our 10% profit and
I was out.
So you know, it's the samething.
If you've got the quality andit's a known quality, quality of
(19:24):
known.
I look at closed-end funds.
I don't buy any unless they'reat least five years in business.
They've got to own at least 50different positions inside, not
30, 50, okay, they've got tohave a distribution history that
I can look at for years andhave stability.
If it's gone up or down, I candetermine why.
(19:46):
Well, it went down wheninterest rates went down, their
distributions went down, theirprice went up.
But after a series of years,just like now.
You guys know that and this isthe way a lot of people look at
the closed-end funds now.
Why are they down so much?
(20:07):
Well, before 2008,.
We had scores of years 50, 60years where 5% was low interest
rates.
What were your first mortgagesat 5% was low interest rates up
until 2008.
At the end of the financialcrisis, for whatever reason,
(20:32):
interest rates went to almostzero and stayed there for almost
12 years.
So the generation of todaywe're talking about 5% right now
has high interest rates.
Yeah, okay, so there's yourdifference right there.
Before the financial crisis,you had all these years of even
(20:54):
double digit.
I remember buying New York PortAuthority municipal bonds
yielding 12% coupon.
So you had these years andyears and years of higher
interest rates before thefinancial crisis.
And you look at any chart along closed-end fund, the chart
is up here.
(21:14):
Then the financial crisis andthen, all of a sudden, the
chart's down here and everybodysays, oh my God, look how the
price went down.
Well, that's why the price wentdown.
These are all bonds, bonds,mostly bond funds, high yielding
securities.
They can't get 10 paper anymore.
It's gone, it doesn't existanymore.
Steve Davenport (21:35):
So that's how would you compare, like a
closed-end funds to a reed,because both contain multiple
investments, both have differentcash flows and one of the
questions I've always had aboutclosed-end funds is is there a
management fee or is there sometype of overhead that we're
(21:58):
paying for that?
When we think about theclosed-end funds, we don't
necessarily attribute it like aninvestment management fee, just
like in REITs.
We don't think about themanagement of the REIT as an
expense, but it is built intothe overall yield.
Steve Selengut (22:20):
It's absolutely built in.
It's absolutely built in and itcan be as much as 2.5%, just
like in a REIT.
It can be even more, but itincludes.
I don't know if REITs useleverage or not, but closing
funds can use leverage up to 50%.
The average is about 30%, whichis lower than the average stock
(22:42):
in the New York Stock Exchange,but that's also one of the
things that go into that.
Decalculation is that.
But the yield is after expenses, after expenses.
So these things aren't allowedin 401ks, which is probably a
good thing because they don'thave the volume, but they're not
(23:06):
allowed in there because theircosts are high.
That's why Vanguard and all theother mutual funds came up with
these 0.5% fee funds so theycould be in these REITs, because
the government set that limitat over 2%.
If your fees are over 2%, youcan't hear, because the
government believes that 3%yield after low expenses is
(23:32):
better than an 8% or 10% yieldafter high expenses yield after
high expenses, you know, is thatstill?
Clem Miller (23:40):
you think that's still going to be the case now
that they're lightening up onrestrictions regarding other
things like crypto and pe and ohman, I don't know what the hell
is going well um I mean, I'mskeptical about all that stuff,
but you would think you'd thinkthey'd put it in closed-end
funds.
Um, you know if they're goingto put in all this other stuff.
Steve Selengut (23:57):
Crypto has almost an unlimited supply right
.
Clem Miller (24:00):
Ultimately it does.
Steve Selengut (24:02):
Yeah, closed-end funds are different.
They're fixed theoretically.
A limited number of shares areout there.
If they were to put thosehundreds of billions of that
type of money in there, theprices of those things would get
their yields down to the pointwhere they aren't split unless
(24:22):
they somehow they don't dosplits, they do reverse splits
they do.
They can do rights offerings.
So you'd probably see somepretty hefty rights offerings
going on.
But I mean, if you were to takehard to say you say I don't
know how long the pleasure ofclosed-end funds as long as
(24:46):
they're a mystery to most people, they're a wonderful, wonderful
source of income, then it's awhole different ballgame and
they may have to reinvent howthey set up their IPOs and how
many shares they can, if theycan add shares over time.
(25:09):
It's a question I hope I don'thave to answer for my advisees
and people now.
I don't know.
Steve Davenport (25:20):
Tell us how long you're going to be around
and then we'll know how longCEFs are going to last.
Okay, Because it sounds likeyou're a pretty strong supporter
.
Steve Selengut (25:30):
Oh, I'm a strong supporter and I've got a lot of
strong supporters, I'vedeveloped a lot of strong
supporters of them, but you knowthey're not popular.
Where it counts, I mean theadvisory services, the advisors
themselves.
I mean you can call up and askthem and some will not even know
(25:50):
what you're talking about.
I use LinkedIn and I put inI'll put in a fidelity screen
(26:10):
that shows the projected annualincome on a portfolio of
$400,000.
And even though it showsfidelity, I won't get anybody
saying how'd you do that?
Or how does he do that, howcome?
Why, what's in there, you know?
Or how big is that portfolio?
That's got to be a $10 millionportfolio.
It's not.
Steve Davenport (26:31):
I think there are some people who worry about
the closed nature andunderstanding everything that
goes on underneath.
Right, I think that I can.
I mean, when I think aboutinvesting, I think about this
thing kind of I call it themessy middle.
And it's where you've got thebonds over here that you're
pretty sure you understand,because they're pretty high
quality.
Corporates and governments getinto what I'll call equity-like
(26:58):
vehicles, such as REITs, such aspreferreds, such as
convertibles, such as munis andthings that have characteristics
that are slightly differentthan these riskless bonds.
And so when I look at yourclosed-end funds and I think
about them, when I look at yourclosed-end funds and I think
(27:18):
about them, where do you thinkthey fit on that continuum of
risk and return?
I know they're high on thereturn side, but we must be
taking some theoretical risk inorder to get that it feels like
(27:38):
it's illiquidity because thesethings are so lightly traded.
Steve Selengut (27:41):
Yeah, okay, the illiquidity is not something.
It rarely impacts your trading,even as heavily as I trade.
And now I've got 550 people inmy RMS community and they're
trading, and very rarely do yousay anybody say hey, I was told
(28:02):
I couldn't, I couldn't tradethat anymore, or I wasn't able
to sell this because there areno buyers, or I wasn't able to
buy it because there's nosellers.
Steve Davenport (28:10):
You just don't get that in the communications
yet, right well, I think Iremember in march of 2020, when
everybody was saying the munimarket is shut down and
therefore, you know, I want tosell my munis, to buy the market
that's corrected and I I can'tget a price on my munis or I
(28:32):
can't get a good price on, andso I don't think the average day
I agree with.
On average, if I can be patient, as you said, most investments
will overcome this illiquidity.
But the question is is therestill going to be a moment when
you don't want, when I want, toget out and buy some of those
(28:55):
stocks that have corrected that?
We will?
You know, were there problemsin 2020?
Were there problems in 2011?
Were there problems in 2008?
Steve Selengut (29:06):
There was never any problems trading the
closed-end muni bond funds.
I can understand why theindividual bonds might have had
some trading difficulties,because they are individual
transactions between you and me.
I've got a piece of paper forsale.
You want to buy it from me andwe have to agree on a price, but
(29:30):
closed-end funds trade likestocks and but but all my point
is is that they they did go downduring those.
But the stock, they were stocksand they they are not impacted
by the same thing that impactsthe securities inside them.
When you sell a municipalclosed end fund, you're not
(29:51):
selling the municipal bonds,you're selling a stock in the
trust that holds those municipalbonds, so you don't have those
kinds of liquidity problems.
And the same with preferredstocks.
When I was growing up investingand I had individual preferred
stocks for people, yeah, therewere times where they were tough
(30:11):
to buy and sell, but when youhave a portfolio of them in a
closed-end funds they're justlike that.
Clem Miller (30:19):
It's never, never a problem never do you look at
yield also as a valuationindicator?
Steve Selengut (30:30):
that's a valuation, not really because
interest.
If you study interest ratesensitivity and just when you
see yesterday what was the news,you know, the interest rates
just went up again, or theyields just went up because all
the prices went down, becausethey're now concerned that
(30:51):
interest rates are not going tobe cut, maybe in September.
So the whole little ups we hadbefore that, or downs in yield,
ups in price, just reverseditself in one day because it got
some news came out that saidthey may not be able to lower
interest rates.
Frankly, I don't think theyshould be lowering interest
rates in this environment either.
(31:13):
But you do have that volatilitywhich is always a buying
opportunity.
How do you spell correction?
O-p-p-o-r, you know, et cetera.
You know, really, I mean onething as an investor that you
got to learn and that you haveto coach your clients in as an
(31:36):
advisor is that there has never,ever been a correction that
didn't, that wasn't replaced bya rally, and vice versa right,
don't get so go ahead oh sorry.
Clem Miller (31:50):
And how do you look at um quality?
Why?
How do you what?
How do you define quality in inyour world?
Steve Selengut (31:58):
well my world used to be when I was buying
stocks.
They had to be profitablecompanies that paid dividends.
The dividends at that time werefor two reasons.
One, they respected theirshareholders enough to pay them
something, and paying dividendindicated that they were
profitable, that they had moneyto give them.
Paying dividend indicated thatthey were profitable, that they
had money to give them, and ifthey ever cut a dividend, you
(32:22):
knew that that was the time toget out of that company, Because
they don't want to ever do that.
It's got to be a really problemfor them to cut a dividend.
So there were two reasons and Ialways had diversified.
Diversification was a big thing.
I used to look at PE ratios andI used to look at
(32:42):
debt-to-equity ratios and theyhad to be reasonable.
Do you know what the PE ratiois on the Dow Jones Industrial
Averages today?
Clem Miller (32:51):
No.
Steve Selengut (32:52):
And do you remember what it was back in the
80s?
Clem Miller (32:56):
Yeah.
Steve Selengut (32:56):
Like seven right .
Clem Miller (32:58):
Yeah.
Steve Selengut (33:03):
In the 80s, yeah like seven right yeah in these
and a zero.
Clem Miller (33:05):
It's really no like 40, something like 40 to 1 now.
Well, the Dow has, as the Dowalso has, changed its
constituents as well as becomeabsolute more growth II more
growth II.
Steve Selengut (33:16):
Yep, they even have things that don't pay
dividends there now.
And look at how the S&P haschanged.
The S&P is almost a mini NASDAQNot quite, not quite, but how
many days do you see?
The Dow is up or down andNASDAQ and S&P are the opposite.
You know the NASDAQ's alwaysbeen that way, but the S&P has
(33:38):
changed a lot.
Steve Davenport (33:40):
So, steve, let's get down to brass tacks.
We've got an investor who wantsto be 70% equity, 30% bonds at
an overall asset allocationlevel.
How do you, where do you?
Do you put 70% into closed-endfunds?
Do you put 30% into closed-endfunds and skip the fixed income
(34:07):
Closed-end funds?
Steve Selengut (34:08):
are fixed.
Closed-end funds are fixedincome.
There are in the universe I usefor closed-end funds.
There's over 110 fixed income,ie anything that has less than
35% in the stock market.
In these closed-end funds Iconsider an income fund.
(34:29):
Anything more than 35% in thestock market is my equity bucket
, anything more than 35% in thestock market is my equity bucket
and I have roughly 110 in theincome and about 100 equity.
Different closed-end funds andthey're all different types,
(34:54):
from short-term to intermediateto long-term, to higher quality
to marginally lower quality,global.
You know, in the muni bond youhave all the different, like 12
different states that haveindividual state bonds and the
regular ones that haveeverything.
So, to diversify and yeah, Iput it all in there because it's
so much easier to you can tradethem.
It's not like an individualbond where, like you said, in
(35:16):
2020, you couldn't sell amunicipal bond.
I didn't have that problem.
So yeah, I do.
However, there are other incomesecurities.
There are REITs, which I usedto do in the old days, and they
are contained in many closed-endfunds.
(35:38):
There are BDCs same thingscontained in a few CEFs and
several or many ETFs.
There are CLOs contained insome CEFs and in ETFs, preferred
stocks same thing both types.
So for my larger, anybody withyou know they got to have seven
(36:04):
figures, million and a half ormore.
Yeah, you can go ahead and put alittle bit into those ETFs that
are in BDCs or CLOs and getaway with it, recognize that
they're more risky than theclosed-end funds and so on.
So, yeah, I use all the varioustypes of securities, but I
(36:26):
don't do them as individualentities anymore.
I need the safety of the fund.
You know the very principlethat brought mutual funds into
popularity, that allowed theaverage guy to participate in
the growth of the economywithout trying to select stocks,
(36:49):
because it was all managed anddone for him.
The same thing that createdthat popularity is pretty much
what I'm saying now.
In the form of CEFs, Iparticipate.
I own 100 different equityclosed-end funds with an average
of over 200 positions in each.
(37:11):
I own every stock you canimagine.
I own the Magnificent Seven andmy average cost per share is
less than $20, and I owneverything.
I think that makes me feel verycomfortable and confident that
I'm participating in the economytotally without having to
(37:36):
select the next winner or worrya bit.
Steve Davenport (37:39):
stuff like that Were you only bank seven, then
what CEF would have that All?
Steve Selengut (37:45):
the CEFs, all the equity CEFs, have some of
them in it.
Some of those CEFs probablyhave all of them.
Clem Miller (37:55):
Why would you need so many CEFs in your portfolio?
Steve Selengut (38:00):
There's two reasons.
There's two reasons.
As an advisor, when I wasmanaging money for people, I
told them that I would never,ever put them in any security
that I didn't own myself.
Fortunately, I had the assetsthat I could make that statement
and hold true to it.
So I wanted them to know Iwasn't just selling them stuff
(38:30):
that somebody suggested to mewas good and that I wouldn't
touch it myself.
Same thing goes with when Iswitched over to closed-end
funds and I had them all becauseI was diversified in all my
portfolios.
And when you start looking atmultiple streams of income, I'm
not looking for a big winner,I'm not looking to grow my
(38:53):
market value, I want to grow myincome.
And the way I do that is withprofit taking.
And if you look at the, if youstudy the market, you know some
years the healthcare industry isthe hero, sometimes it's the
oil industry, right now it's IA,you know.
So it's always somebody that'sgoing up and somebody that's
(39:17):
going down.
I always want to own somethingthat's going up.
So what I do with theclosed-end funds is I own them
all.
I take profits on them ratherquickly, faster than most people
would Rather quickly, fasterthan most people would.
I have an average.
The average yield on myportfolios in the equity and
(39:40):
income is a little less in theequity than the income, but
roughly an average of 10% acrossthe board.
So when I look at one of mysecurities that thing is paying
(40:06):
me three quarters of 1% a month.
Okay, so if I find a lotsomewhere where the lot itself
is up one and a half percent, Isay wait a minute, that's two
months income.
I just bought that thing fivedays ago and it's up, you know,
and I can make two months incomeon it.
I'll do it, you know.
So if you manage your portfoliothat way, you keep generating.
That same capital can bereinvested again and again and
(40:27):
again.
Right environment, anenvironment simply where you go
up three or four days in a row,you're going to have these
profit-taking opportunities,even though the entire position
isn't in the green.
You have this other stream ofincome from the tax lots.
This couldn't be done back inthe 80s or the 90s or even even
(40:53):
up through 2012, because youdidn't have the technology.
But today you open up fidelity,you can see everything that
you've bought for you know yeah,do you um?
Clem Miller (41:04):
do you keep a uh significant cash position or do
you stay fully invested?
Steve Selengut (41:09):
I stay fully invested or except for, you know
, right now I have a large sumof cash to pay my taxes, but you
know.
So out of each monthlydistributions, if I have
upcoming expenses, I'll set asum aside.
But I just have a reserve.
I don't try to time the marketat all because my yields are so
high and some of the people inthe community call it blizzards
(41:38):
blizzards of money coming in atthe end, first day and last day
of the month from thedistributions on all these
things that you pretty muchalways have cash to take
advantage of.
Some things that go down, stufflike that.
Clem Miller (41:53):
Do we need to worry at all about the leverage
that's in this?
I mean, how did these things doin 2008?
Steve Selengut (42:01):
They were fine.
In fact, as we came out of that, we did even finer because
interest rates went down.
So these guys are managers.
Leverage isn't something that'sautomatic.
You know you make a decision.
I can borrow money just likeyou would in your own life.
You know I can borrow money at2%.
(42:25):
Why would I pay that $100,000for a Mercedes if I can borrow
this at 2% and buy that?
Sucker you know, you know,that's the type of
decision-making they make too.
Clem Miller (42:40):
Do you study the managers as well?
Steve Selengut (42:43):
I study the providers, like if it's
BlackRock or Nuveen or you knowthose types of names.
I don't worry If I see a namethat I'm not familiar with, like
the first time I went with,let's say, doubleline.
The first time I saw one oftheir closed-end funds, I'd
(43:05):
studied it pretty carefully andlooked around at all the past
and everything, and I do thatevery month anyway with all of
them.
But yeah, there are about 45financial institutions Most of
them you'd know their names thatproduce closed-end funds.
The biggest names are Nuveenand BlackRock and PIMCO, and
(43:32):
PIMCO.
Steve Davenport (43:33):
So when you look at these the
cross-ownership of the sameclosed-end funds in Nuveen Fund
1 and BlackRock Fund 2, does itbother you?
Do you ever aggregate acrossthe different funds to determine
what is your biggest closed-endfund that's held by?
Steve Selengut (43:54):
these your biggest closed-end fund, that's
held by these?
Steve Davenport (44:00):
Do you aggregate all of the underlying
holdings and get a perspectiveof your?
Steve Selengut (44:04):
overall holding, absolutely.
Did you see that symbol thatwas up before my face came up on
the screen, that pyramid, yeah,the pyramid You're familiar
with the risk pyramid.
Steve Davenport (44:17):
Yeah, a little bit.
Steve Selengut (44:18):
Okay, so there are about 40 different types, 42
, 43 different types ofclosed-end funds that we've
identified and we've segregatedthat into eight floors of a
pyramid, and the four bottomfloors are the fixed income
(44:39):
investments, with government and, and you know, state municipal
bonds on the bottom, so to speak, and then the first equities
appear on the fifth floor.
On the fifth floor and then wayup there on the top floor are
things like REITs, not REITs,MLPs and things like that, not
(45:03):
REITs.
Okay, is that?
I prepare for the people in mycommunity.
Every security has the riskpyramid level associated with it
, so they can actually bynumbers determine.
Steve Davenport (45:25):
You know, they know that all their bonds are
less risky than all their stocks, so even a bond fund that might
be using leverage.
All of the municipal bond fundsuse leverage.
Leverages there must be somethat use more than others.
Steve Selengut (45:43):
The maximum allowed is 50%.
Okay, the average usage is lessthan 30%, which is like I said
before.
I think when we were talkingearlier, that 30% is less than
your average company on the NewYork Stock Exchange.
Steve Davenport (46:05):
So how would a muni bond that's using 50%
leverage compare to an equityclosed-end fund that's using 20.
Steve Selengut (46:18):
In what way?
In risk.
Steve Davenport (46:19):
It's much less risk when you just spend the
first four levels of fixedincome and then you put the
equities on top Right.
I just told you a muni bond isa 50% Right.
So you're saying that one ofthe equity guys can move down
into the four bottom layers.
Steve Selengut (46:37):
No, no, they can't.
Equities are always more.
Stocks are always more riskythan bonds when a company goes
bankrupt who gets paid out?
Steve Davenport (46:47):
I just asked you when you said that the muni
bond was riskier, didn't you?
No, no, no, never.
The muni bond was riskier,didn't it?
No, no, no, never.
So they're using 50% leverageand they're less risk than the
equity guy who's using 20%leverage.
Steve Selengut (47:01):
Yes, less financial risk.
We're not talking about marketvalue risk, we're talking about
financial risk.
The risk of total loss of yourmoney is always greater in an
equity position than it is in abond position, always when a
(47:22):
company goes under.
Steve Davenport (47:24):
A yield bond is going to be less risky or more
risky than an equity that haslow leverage in a closed-end
fund.
Less risky.
Steve Selengut (47:39):
A bond is always less risky than the same
company's stock.
Steve Davenport (47:44):
It's higher up on the capital structure, it's
higher up on the capitalstructure, I know, but if the
capital structure of a companyis poor, and they're borrowing
more than they should then theycould be more risky than the
bond that you're saying has abetter capital structure but a
worse company.
Steve Selengut (48:02):
If the company goes out of business, it has to
pay the bondholders first, evenif they are high-yield bonds.
And they can't even pay anotherdividend to their shareholders
until they pay the interest.
Steve Davenport (48:15):
I'm not asking you within the same security, oh
okay, no, and across differentsecurities.
Okay, yes, so that's what I'msaying your pyramid, that middle
level of your pyramid, I'm notsure how you go from the lowest
risk equity to the highest riskequity fixed income, when in
reality you could have-.
Steve Selengut (48:36):
There are one or two closed-end funds high yield
global.
That would be up there with thebottom tier of the equities.
So yeah there may be two orthree that infiltrate up.
Just like when I use ETFs, Iconsider them all riskier, but
(48:59):
there are ETFs that just investin closed-end funds, so they're
lower in risk to me.
Clem Miller (49:06):
But yes, I see your point.
Steve Selengut (49:08):
You're absolutely right.
A high-yield global CEF wouldbe more risky, probably, than
the stock of a company likeExxon.
Steve Davenport (49:22):
Yeah, I'm just saying there are cases where
people manage their equity soconservatively to generate
income selling call options, andso I pursued with people who
wanted to own some of thesethings and ETFs, and then I
would write calls against thoseETFs, and so one of the things
(49:45):
we did was, you know, at onetime J&J call options had a
volatility of 8%.
Now the overall risk of themarket is 15.
And how do you get a corporatethat has that lower risk Because
their balance sheet quality isstill AAA.
Steve Selengut (50:05):
So good yeah.
Steve Davenport (50:06):
Right, and so all I'm saying is there can be
cases where equities willpresent as having less risk, and
I guess I'm just trying tounderstand where they're going.
Well, the highest Things don'tall.
I love charts that sayeverything fits in this diagram,
and then you say well, there'ssome uncertainty between this
(50:31):
level and this level.
Steve Selengut (50:33):
I absolutely agree.
I didn't mean to make it saythat it's an absolute.
There are no absolutes, you'reright, I totally agree with you.
But the thing that is mostinteresting is that when you
have this broad diversificationthat I encourage you know I'm
(50:57):
talking mainly to six-figureinvestors and so on that I
encourage investors to own themall is because there always
seems to be something that youcan take a profit on when you
own that diverse portfolio, beit equity or fixed income.
Steve Davenport (51:18):
Yeah, I mean I like the fact that you're
constantly monitoring and tryingto take advantage of some of
those moves.
I like the fact that you'retrying to look at the right
managers to make sure they'reassembling good holdings
underneath it.
I like your approach, steve.
I think it's worth considering.
I guess the place that I havethe problem is can I go 100%
(51:42):
with an account in this, and Iagree that you're going to
pretty extensive diversification.
I see the benefit of having a10% yield.
I guess I'm trying to determinewhat's your overall return for
the last 10 years or the last 20years or some, for a strategy
(52:04):
like this.
Steve Selengut (52:13):
Well, a strategy like this has grown the working
capital every quarter, everyyear.
Working capital, which meansthe amount you have invested in
your portfolio and the income itproduces, are growing every
year.
My projected 12-month income isgrowing every quarter, every
year.
Now the market value is goingto vary.
(52:34):
Interest rates go up.
The market value is going tovary.
Interest rates go up, my marketvalue is going down.
There's no doubt about it.
The stock market may still begoing up.
The stock market is going upand interest rates are stable or
going down.
I'm going to be at an all timemarket value high too, but I'm
not going to have exponentialgains in return because I'm
(52:54):
clipping my profits andinvesting in things that are
down.
I'm happy seeing more red on mystatement than green, and
particularly in the environmentwe've had this year, for example
, with the relatively smoothcross pattern.
(53:15):
We haven't had huge.
We have one significant down,but no real huge ups.
I mean the Dow hitting thatall-time high the other day, on
August 22nd and 28th.
Those are the only twoall-times highs it's hit all
(53:37):
year.
Right now, today, it's aroundwhere it was last December, last
November.
So we're in a rally that's beenpushed by the Magnificent Seven
in my mind, and certainly notby the overall.
The Russell is a good indicator, in a sense, of the overall
(54:01):
economy because it's so manycompanies and they're all small
cap.
It's where it was five yearsago, you know.
So we're in a rally that's beenfueled pretty much by AI.
Steve Davenport (54:16):
Yeah, all right , I'd like to give everybody a
last chance to have any commentsor questions.
Clem Miller (54:24):
I don't have any.
I would just say, steve, that Ithought this was a fantastic
discussion and I believe weshould try to have you back to
discuss even more.
Steve Selengut (54:34):
That'd be great.
I'd like that.
Maybe we can look at somenumbers the next time.
Steve Davenport (54:40):
Yeah, yeah, I mean, do you want to say
anything to our investors, likewe're trying to improve the
investment IQ of people wholisten, do you?
Have any suggestions in termsof.
Steve Selengut (54:52):
Oh no, any suggestions in terms of oh no.
I think it's great the way youdiscussed and and get into it,
get into the you know thenitty-gritty with your, with
your guests.
I think that's fine, I think.
I think you pointed out to mehow I expressed something
created an assumption that Ireally didn't want to create.
It was just categorization.
It wasn wasn't a distinctive.
(55:14):
You know everyone suits that,but that was great.
But yeah, I think people shouldgive the income-focused
approach a look, because thereare many within ETFs and CEFs
just a small number of ETFs, alarge number of CEFs.
(55:35):
There are ways to generatesignificant income, particularly
with a retirement portfolio.
That isn't being suggested toyou by most advisory firms.
Steve Davenport (55:52):
I think you made a lot of good points.
I like the use of some of thesestrategies.
I believe that income frombonds is not risk-free.
We need to understand that.
We need to understand that theUS government and how they
manage their own balance sheetcan create risk, just like any
(56:12):
other business can create riskwith too much debt.
So I agree with a lot of yourpremises and I like the fact
that I don't like to have aduration that's too long, and so
if my income came from some ofthese vehicles, I think they
would be additive to the overallrisk and return spectrum for
(56:35):
our clients.
I appreciate it.
I agree they would be Okay.
Thanks for joining us and Iappreciate any.
Let's try to do it again soon.
All Skeptics, investors, pleasecheck out Steve and some of his
ideas.
We're going to have a link onour transcripts that you can
(56:59):
look at some of the stuff, and Ithink it's worthwhile to always
think outside the box, becausethe box the market participants,
particularly the street, putsyou in sometimes isn't the right
box.
So thanks everybody.
Have a great day.
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