SJBenen Advisory, LLC
Sam Benen is an Investment Advisor at SJBenen Advisory, LLC, a Registered Investment Adviser firm, established in 2016, located in Chapel Hill, North Carolina. Sam and his team are committed to upholding the highest standards of ethical conduct and acting as a fiduciary to serve the best interests of his clients above all else.
Sam has been in the investing business since graduating from Princeton in 2007 with a Bachelor’s degree in economics. He got his start in financial markets right out of college working as a trading assistant at Susquehanna International Group, participating in arbitrage strategies in options and ETFs. Sam worked for nearly 4 years as a trader at a hedge fund in Greenwich, Connecticut called Paloma Partners, where he worked for one of their internal groups called Xaraf Management. At Xaraf, Sam and his team traded in a wide range of derivatives markets, ranging from bonds to stocks to currencies. He worked for nearly 5 years as a portfolio manager at Talpion, a family office in New York City. His focus there was trying to generate absolute return in all market environments, meaning he tried to make returns whether the market was up or down by finding niche pockets of financial markets where he had an edge.
Sam was a top-ranked chess player in the nation, winning 7 individual national chess championships between the ages of 8 and 18. He is an ever-aspiring dilettante at all kinds of strategic games like Scrabble, Boggle, gin rummy, poker, and his favorite of them all, golf. Sam is originally from New York City and now lives with his wife in Chapel Hill, North Carolina.
BA, Economics, Princeton University
Assets Under Management:
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Sam Benen -- SJBenen Advisory, LLC
Hi, I completely understand the information overload on the internet. I can tell that you want a clear, straightforward answer. So here it is. If you came to me and wanted me to help you start investing, I would turn you away. I would tell you to pay down your debts first and then come back to me for investing help once you were out of debt entirely. In fact, I would read you the riot act and tell you to eat ramen noodles and live a life of total austerity to put every available dollar in your bank account towards getting out of debt. Period. Start with paying down the credit card debt first, since that is clearly going to have the highest interest rate.
Here's a quick guide to ETFs for beginners looking to manage their own money: Look at broad-based index ETFs with a total expense ratio under 0.15%. You can browse around on the websites of Vanguard and iShares for index ETFs with extremely low fees and many holdings. On the information page for each ETF, they will show you the number of holdings (you want very high) and the expense ratio (you want very low).
Do not use leveraged ETFs or anything fancy like that. Those are for speculators and not for long-term investors. Think ETFs with names like "Total US Market," "All-world ex-US," and "Aggregate bond."
Also, look for brokerage arrangements where you can trade ETFs without commissions. For example, in a Vanguard account, you can trade Vanguard ETFs without commissions, and in a Fidelity account, you can trade iShares ETFs without commissions. Paying zero commissions and micro fees (under 0.15%) will help you get to your beach house faster, while paying high commissions and high fees will only help pay for the broker's beach house! In all seriousness, fees are an important component of total return for long-term investing, so make sure to keep them low!
If you do not want to manage your own money or need further help, consult with an advisor or financial planner to discuss personal goals and asset allocation strategies.
The financial instrument he used is called a credit default swap. The size of the short position you are referencing is called the notional value of the swap. The reason he needed to speak to the bank up front about doing this transaction is that trading swaps requires an ISDA agreement, which is a document executed between a large bank and a hedge fund that wishes to speculate using complex financial instruments.
The way credit default swaps (CDS) trade is the following: There is an effective life of the contract, usually around 5 years, over which the swap buyer pays a fixed premium every year to the swap seller. The swap seller collects this premium free and clear if the underlying debt obligation does not default; however, in the event of a default, the buyer has the right to swap out defaulted bonds for the full original par value. Like an insurance contract, the buyer is paying the premium for the possibility that the debt defaults, while the seller collects the premium and hopes nothing bad happens.
CDS is quoted in basis points per annum. If a debt obligation is deemed very safe, the CDS on that debt obligation will trade at a low premium, i.e. not a high cost to protect against its default. In 2005-2006, CDS were trading with very low premiums because of a perception that underlying debt obligations, such as mortgages, were very safe and unlikely to default. Because of the low premium, a speculator who wanted to bet on a default could pay a small amount to make a huge multiple of his/her money.
Say Dr. Burry wanted to buy a CDS contract on a basket of mortgages. And say the CDS contract was a 5-year, quoted at 50 basis points (0.50%). And say Dr. Burry wanted to transact $100 million notional. Every year for 5 years, Dr. Burry would be obligated to pay 0.50% of $100 million, i.e. $500k. If nothing happened, the CDS seller would collect $2.5 million in total over the 5-year life. But, if a default happened, and the bonds crashed to 10 cents on the dollar in a bankruptcy proceeding, Dr. Burry would be entitled to a windfall profit of $90 million: $100mm * (100% - 10%), i.e. the notional value times the difference between par and the recovery.
The losses that Dr. Burry incurred initially were due to the fact that he was paying premium for these CDS contracts but no defaults were happening. This can be very painful as a CDS buyer because you have to time it right to win. If nothing had happened until after the life of the contract, or until he ran out of money to make the premium payments, he would have lost it all.
So, if he had a $1.3 billion short position all in all, that was merely the notional value. If the average price of the CDS were 100 basis points (1%), his annual premium obligation would have been around $13 million. That is a lot of leverage - to control $1.3 billion of bonds in a bankruptcy with only $13 million in annual premium. When the bonds went belly-up, he made a mint.
This is not something you can do in your brokerage account. To reiterate, trading swaps with a bank like Goldman Sachs requires an ISDA agreement, which is typically only granted to institutions with at least a few hundred million dollars. Hope this explanation helps.
I think 1-2% is an appropriate allocation to have in gold. I wouldn't go crazy with it.
The two forms of gold ownership are financial gold and physical gold. Financial gold is that which you can trade in a brokerage account without actually physically holding the metal. This includes the popular GLD ETF, gold futures, and other derivative products tied to the price of gold. Physical gold is that which you can hold in your hand, actual metal in your possession.
I think trading financial gold is dumb. It is by definition a speculative asset. It doesn't pay any dividends or interest and it isn't linked to the value of anything else; it is merely a store of value, based off of what people feel like paying for it today. Right now it's around $1,228 an ounce. But who is to say $1,200 is 'cheap' or $1,300 is 'expensive?' Sure, pundits and speculators might say it's linked to interest rates, the money supply, Federal reserve policy, the amount of new gold being mined out of the ground, global political uncertainty, etc. But the honest truth is it's anyone's guess what gold should be 'worth.' Trading GLD in your brokerage account is no different than playing the ponies at the track.
The main benefit of owning gold, in my opinion, is to own a physical, tangible form of money that acts as protection against some kind of disruption to our global currency system. When you really think about it, we are heavily dependent on a global network of electronic money that moves around via the internet. Most of our money is accessed with usernames, passwords, and account numbers, on a computer screen protected by 128-bit encryption. Not to be all doom-and-gloom but if you've ever watched the TV show "Mr. Robot," you could stretch your mind and envision a scenario where a sinister group of hackers disrupts the integrity of the electronic, internet-based money system we've all come to rely on.
If you couldn't log into your bank account or get cash from the ATM because of some kind of calamitous disruption in our global monetary system, what good would shares of GLD in your brokerage account do you? In my mind, the entire point of owning gold is to have tangible, 'offline,' physical money. If everyone is waiting on line at the ATM and the credit card machines are down, you couldn't use shares of GLD to buy bread! That is why I think financial gold is a useless form of speculation and for real protection you want to actually have the metal in your possession.
Thinking in that vein, I recommend owning small-denomination government-issued mint coins. These coins are widely recognized by collectors, gold dealers, and even financial institutions. They are legal tender in the country in which they are issued, even if their tender value is significantly less than the value of the bullion in the coin itself. For example, the 1/10-ounce American Gold Eagle, manufactured by the US Mint, contains 0.1 troy ounces of gold bullion and has a legal tender value of $5. Of course, the melt-down value of 1/10 ounce of gold itself is worth over $120, so you would never actually tender it for $5 worth of goods or services, but the fact that it is government-issued legal tender lends it a certain authenticity and recognizability. Coins from government mints are fairly easy to transact and the value is well-known in advance of the transaction. If you ever want to sell, you can always contact a bullion dealer who is willing to buy them around their fair value. They are attractive, handsome collectible pieces. I suggest keeping them in tip-top condition from the time you buy them, in their original packaging, unperturbed by the oils from your fingers. If you must hold them up to take a look, use cotton gloves. Mint coins have the ability to appreciate purely on their collectible nature. For example, in 20 years’ time, a US Gold Eagle from the year 2017 in brilliant uncirculated condition will be a neat thing to own and it will likely fetch a premium to the melt-down value just because they are vintage.
Having said all that, I am confident in our monetary system. Commodity-backed monetary systems such as gold standards have been tried at various points in history. As recently as 1971, US dollars were statutorily convertible into gold. Now, dollars float freely against other currencies and are backed not by a commodity like gold but only by the faith and credit of the US Government. Now, in 2017, there is less and less paper money in circulation relative to the overall money supply, so money mainly exists in computer databases. In some ways that is scary, but mostly it is a very robust system. Two hundred years ago, the US was on a bimetallist standard (gold and silver), so you could say our money was backed by hard assets, but there were many more bank robberies, bank runs (when banks have to shut down because too many people wanted to get their money out at once), and money shortages that would lead to economic turmoil.
Gold is a bit old-timey and archaic, but it is still widely recognized as a store of value. In a very inflationary environment, where the value of our currency is debased against goods and services we need to buy, gold is likely to hold its value better than US dollars. But, I wouldn't expect gold to give you a great long-term return. I would expect gold to keep pace with inflation, but that's about it. So, it's not worth making a major asset allocation to gold, i.e. no more than 1-2%. Just buy some US Mint coins and keep them somewhere safe in the unlikely event something crazy happens with our current global order of electronic money. Make sure you find a reputable bullion dealer. Definitely do a lot of homework on them before making a purchase. The coins make nice collectible pieces and in a real crisis you can always cash them in.
There is an ironic tidbit about diversification in today's day and age. Before index ETFs were so prevalent, investors would achieve diversification through buying a number of stocks (or bonds), so that one bad performance by one single company couldn't crush your whole portfolio. Today, with the wide availability of low-cost index ETFs, buying more securities doesn't diversify you more, and you can in fact be maximally diversified by holding just a few tickers. It is counterintuitive, but here is an illustration:
Portfolio 1: 50% in a total US stock market index fund, 30% in a total all-world ex-US stock market index fund, 20% in an aggregate bond fund. ***Total tickers/securities held: 3
Portfolio 2: 10% in a portfolio of 20 individual stocks (0.5% each), 10% in the utilities sector fund, 10% in the technology sector fund, 10% in the US small cap fund, 10% in the emerging markets fund, 10% in a developed market Europe and Far East fund, 10% in the US large cap fund, 5% in the REITs fund, 10% in long-term treasuries fund, 10% in intermediate term corporate bonds fund, 5% in short-duration fixed income fund. ***Total tickers/securities held: 30
Portfolio 2 has way more securities, but is actually less diversified. Why? Because there are these individually concentrated bets on individual sectors and stocks, while Portfolio 1 is broadly allocated to thousands of stock and bond issues that are underlying the index funds themselves.
I see this in people's portfolios all the time. Rather than just buy the broad index funds, they feel they are diversifying literally by buying more tickers/securities. It's a fallacy and a value-destroying behavior. Bear in mind that concentrated sector funds that are not simply doing passive sampling of broad-based indexes tend to have higher fees than the broad index funds. Plus, you are having to do more trading to buy and sell a greater number of securities. For all these reasons, for long term investors seeking maximum diversification, I typically advise a very simple, streamlined portfolio of just a handful of tickers (all index funds). It may seem a little scary to have so much concentration in just a small number of tickers, but these broad index funds represent ownership in thousands of underlying securities and are very well diversified in a one-stop shop.
So to answer your question directly, yes. Not only is it possible, it is a common mistake.