20/03 – March Market Commentary

March… Much has happened.

So much can be said. We trust that you have heard at least half of it in your own news feed and so we are dispatching with our regular content structure for now. Instead, we want to reiterate what you are getting from Ballast Capital Advisors.


What we do
We focus on cash flow producing investments. Namely, fixed income markets. Simply, we buy an investment (bond), receive contractual interest (coupon), and at some predetermined time in the future receive our money back (par at maturity). The cash flow is knowable, and the return defined mathematically. We tend not to focus on equity markets. These (stocks) are bought, receive no contractual cash flow (dividend discretionary), have no maturity (perpetual), and uncertain future value. The return is undefined and uncertain. In times like March, equity investors find themselves grasping at straws. What do they own? Most of the time investors don’t know what they own but are willing to accept not knowing so long as their account value goes up.


Why our approach works
Our process and philosophy are the same as what is core to most institutional investing. Ever considered buying a fixed or indexed annuity or wanted to rely on a pension? It’s a bond portfolio, like the ones we construct, at the center of the investment portfolio that back your “guaranteed” return.


How it works
We build portfolios with a combination of cash, core, and non-core allocations. The allocation varies by client objective and risk appetite. Core is the base with which we work off. The core allocation is in debt of high-quality companies (often household names) that carry a small empirical chance of default and loss. Core is generally the largest allocation of a portfolio. Non-core is an allocation where we seek to enhance portfolio return and build off the (core) base. These are in opportunities that require more underwriting because they carry some more risk than core. Finally, cash is an essential allocation in our portfolios. Not only does it serve as the basic rainy-day fund, but it also is the most valuable “option” our investors can have. It represents the option to buy opportunities when they come along.


Why this is a time of opportunity
At time of peak uncertainty, risk premiums rise, which lowers prices on everything investable. Companies are capitalized (collectively, so too is the economy) with various instruments that carry differing claims on assets.  Generically speaking, debt is senior, preferred equity is between, and common stock is junior. When the market hits an air pocket like we experienced in March all prices fall: asset, debt, preferred, and common. But, in reverse order of claim to asset, common should be most worried followed by preferred and then by debt. If all prices have fallen then one can find more comfort investing in reverse order of worry – that is: debt, then preferred, and then common. In the highest quality companies, you can find great opportunities in the debt with little worries. We call these core positions. In more questionable companies, you can do research work and find opportunities in the debt or down the capital structure (preferred or common) for attractive total return opportunities. These come with a bit more risk. We call these non-core, or total return positions. What happened in March was a freight train (COVID-19) collision with capital markets that has left investors uncertain in every market corner. Now is the time to activate cash allocation to expand core and to do the research work and build non-core. Opportunity.


Why you shouldn’t worry
Our risk management, portfolio construction, investment underwriting, and underlying positions work together as ballast in a ship – in calm seas or choppy, the objective is to keep the ship upright and moving forward. We work tirelessly so that you can rest easy.


Be safe.

Guess what stock this is?

Our belief resides in the fact that economies grow through productive means – not monetary stimulus.

Imagine if you had this in your portfolio one year ago – you would be up 100%!

Wish you had bought it back in 2018, right?  Well, it isn’t a stock – it is a bond.  And it illustrates what is wrong with our global financial system.  I would have used ‘capital markets’ but didn’t want to affiliate the word ‘capital’ aka true capitalism with today’s market place that determines the price of money since the system of setting the price for money today is the furthest thing from a free market.  Today’s marketplace unfortunately is controlled and manipulated by a handful of central banks around the world.  Within the walls of these institutions likely are bright people but it might be that when separated from a text book or classroom, they struggle with common sense.

Maybe we are missing something – but to us the reality today is that our monetary system is out of control.  If monetary policy of forcing rates to 1 or 2% didn’t create the growth they were looking for, what makes them think that zero (or negative) will.  Our belief resides in the fact that economies grow through productive means – not monetary stimulus.  Maybe stimulus encourages investment in productive assets – supporting future economic growth – but it seems that today’s central planners believe monetary stimulus equals growth – which isn’t true.  In fact – unintended consequence are bubbles and the misallocation of capital.

What has the past 10 years of extreme monetary policy (cheap money) generated? 

First and foremost – it generated $16 TRILLION of ‘assets’ (we would call liabilities) that no one who values their capital should touch in a million years…

Here is a chart showing the market value of negative yielding debt around the world.   Five years ago – it was about zero.  Today – $16 TRILLION.  And global GDP has grown by $10 trillion over that time frame.    Not a good return in our opinion and creates a larger problem of how to get out of this addiction.  Our thoughts were summed up well in this Forbes article.

Second – Unicorns (private companies valued over $1 billion).

When money in your pocket costs you to hold it – then you are incented to put it ‘to work’.  Unfortunately, cheap money has no value and results in malinvestment.  Similar to the late 90s – when companies focused on ‘clicks’ – it seems today it is more important to focus on revenue growth than profit growth – which to us is illogical.  However, GS (Bloomberg article) tells its clients as much – focus on revenue growth and not profits – now – their incentive is about 4.4% in fees per IPO – with having done close to $6B in IPOs – they have earned close to $262 million selling new IPOs just this year alone.  So – they made $262mm selling companies they are telling their clients to buy – maybe they should roll that $262mm of fees into all those money losing companies for 10 years – since it is such a good deal. (Bloomberg League Table – 9/4/2019)

WeWork – IPO announced.  The last valuation of WeWork was done at a $50 billion valuation by SoftBank.  Today IPO price talk of WeWork is $10-15 billion.  How does the value of an asset decline by $35 or $40 billion in such a short time frame?  Well some examples that come to mind are Enron and WorldCom in early 2000s – but these were both frauds.  Others would be CSCO, MSFT and many other Tech companies in FY00 – but these are all in a bubble.  Well – today you can include WeWork, UBER, WORK, LYFT and many other multi-billion companies that don’t make money, may never make money, but the reason to buy it was growth at any cost.  Well, once the market wants a return on its capital, the downside is treacherous (remember when people paid for ‘eyeballs’ and ‘clicks’ in late 90s).  But how should one determine a return on capital or how to assess what their returns should be?  It comes back to our philosophy of knowing what you own.  This philosophy leads us to our final symptom of crazy monetary policy – the rapid growth of passive investing.

Third – Passive Investing –  Talk about being as far away from knowing what you own. 

If you want a market return – that is fine but just don’t pay anyone for it. Go do it yourself and pay about 5 bps in low cost ETFs.  However, if you actually want to know what you own – like where you put your money, how much is it earning and what is the thesis around why the value of the asset you own is supposed to grow over time – then passive investing is one of the worst ideas ever.  It reminds us of all the water cooler conversations in the late 90s where the topic was someone’s great stocking picking abilities – don’t confuse a bull market with investment skills – the results can be devastating to your capital.

Go capture Beta (passive investing) just don’t pay for it. If you want a portfolio constructed from the bottom up – then pay for it.  But in doing so – know what you are paying for and if you look at your statement and it consists of 8-12 funds or a hodgepodge of stocks, then you might want to think long and hard about what you are paying for – you may have just paid for something that could have been free.






We Buy Assets Not Stories

Ever watch a movie that had a bad ending?  

One negative aspect of watching a movie with a bad ending is that you spent a couple precious hours of time that you can’t recoup.  Investing in stories with bad endings causes damage similar to that of lost time – in your case – you lose capital – and if you are working, you need to then spend more hours working to recoup the capital lost.  This is a simple analogy that illustrates why our investment philosophy is to prefer buying assets and not stories with bad endings.

How does Ballast define a story versus an asset? An asset is something that most of the time has cash flow or a clear path to terminal cash flow.  A story tends to have negligible or negative cash flow with the promise that a happy ending provides a cash windfall.  Given these definitions – it becomes clear why we don’t spend much time in the public equities market looking for ideas – most of the time we find stories – whose ending is unclear and uncontrollable.

Lending to an established business with a stated return – that is an asset.  Investing in a crazy uncle’s idea on how to revolutionize the automobile industry – that is a story.

Let’s investigate with some concrete examples since at Ballast our philosophy is to openly share ideas.  Side note – If you have to invest in something to find out what is in it – that is like paying to watch a movie with a bad ending and not even getting to see the movie trailer.  By definition a bad idea (whether it turns out well or not!).

Two assets we have recently acquired for qualified clients:  

  1. A dairy loan in Idaho where we lent money with a projected IRR of 18% over 2 years.  Here we are secured with collateral that exceeds the value of our note, receive monthly interest and have line of sight to a terminal value.
  2. Another was a trade based on the Hong Kong Dollar – this is as much a story as an asset – but the beauty is that you get a full refund (note matures) in the scenario the movie has a bad ending.  What more could you ask for? Here you have a note with an imbedded currency option from a high quality bank – in the end, receive par plus a multiple on the favorable performance of the currency. Watch a movie for free – if it has a good ending, you could make 3 or 4x your money, but if it has a bad ending, the movie theatre refunds your money.

What are some bad ending movies Ballast has watched but not participated in? Clearly one “movie” we love to watch is Tesla – A Tall Tale.  They don’t pay dividends and the business consumes cash – so clearly more of a story.  What will be the ending? We don’t know but even with a good ending there is no guarantee the price of admission was worth it. Over the past two years they have been up 50% as well as down 50% on your story (Bloomberg) with not certainty of the ending.

Ballast buys assets not stories.  Sure there are always good stories – but stories are where capital most likely goes to get destroyed. Assets are what builds capital. Most investments have both an asset and a story component – and the key is making sure that the asset doesn’t get destroyed in an event the story has a bad ending.

How Much Money is Your Wealth Actually Making?

We like to have certainty in returns.  As much certainty as you can get.

– By Steve Harms, CPA, Chief Financial Officer

I’ve been reading and hearing “experts” pontificate where to find “yield” or “return” in the environment we find ourselves in today.  So first…Where do we find ourselves (not an all-inclusive list)?

  • Extended period of unreasonably low interest rates – like 5,000 year lows: Post WWII average on 10-year US Govt bond is 6% versus 2.56% post Global Financial Crisis (GFC). [1]
  • Extended period of overpriced equity securities based on fundamentals (longest bull market in history)
  • Companies issuing cheap debt to buy back stock
  • Monetary authorities continually manipulating supposed free markets with Quantitative Easing, currency manipulation, trade wars, interest rate normalizing followed by political pressure to not normalize rates, etc.
  • Economic uncertainty among some investors and consumers, while some tout we are in the midst of economic boom

So where do you go to find the best return while considering the risk?

I’ve read and heard some “experts” state that you need to be in equities today for your best chance at the highest total return possible.  What is “total return?” Some say total return is measured by adding interest received and receivable, dividends and distributions received, capital gains, and capital price appreciation based on increase in market price of an asset.  Oh…and by the way, keep in mind that total return should also include capital losses and capital price depreciation. Total all of the preceding and divide it by the cost of your investment and you get your total return.

Therefore, given that since May 2009 the S&P 500 has an annualized total return of approximately 12% and even in the last 2 years the S&P 500 has annualized total return of over 10%, [2] many advisors are concluding that you should be heavily invested in equities with strong dividends and upside price appreciation propositions.  We’re not saying you shouldn’t be in public market equities, but there is a different way to get strong returns without taking such big unknown risks as what publicly traded stocks inherently have.

Returning to calculating total return for a bit.  I have a more conservative, personal measure of total return.  It’s interest, dividends, and distributions received plus/minus capital gains/losses (aka…cash in my pocket).  Most would call this cash-on-cash return, but I personally don’t want to count on “on paper” gains that rely on timed sales.  Analyzing how much money my money is making I want to only “count” what I’ve received in cash and what is contractually owed to me in cash.  Price appreciation on investments and future dividends are not contractual. They can go away at any time. Company boards have to approve dividend payments.  If the cash flow isn’t there, boards can reduce and even eliminate dividends. This bull market has lasted so long that some think it’s a forgone conclusion that price appreciation is here to stay…forever and ever…because the market has always, over time, had positive price appreciation.  Individual stocks have not, but overall, the market over time has had positive total return…to date.

There is no certainty in future dividends or capital appreciation.  Even dividends received in the future and capital appreciation happens, there is no certainty either of those will continue.  What happens if when you really need cash from your investments, the market is down considerably, and dividend payments have evaporated?  Companies have leveraged themselves quite a bit during this bull market run. If revenues decrease and cash flow is hurt as a result, cash will be needed to service debt and dividends might get cut.  Again, dividends are not contractual. Debt payments are.

We like to have certainty in returns.  As much certainty as you can get. If we follow our rules of knowing what you own and why you own it, we believe we can get as much return (or close to as much return…cash on cash) as those taking equity risk (i.e. risk that your net worth can decrease significantly from one day to the next, and that your cash flow that you have been receiving from your equity investments could go away or be reduced significantly year over year).  Portfolios we have built are constructed to generate as much return through cash flow as opposed to random market price return. With a mix of core fixed income (contractual cash flow), strategic fixed income (contractual cash flow with some upside potential), and alternative investing, we have portfolios that earn steady cash on cash returns that can be relied on, even when market prices decline.  Why risk your hard earned and diligently saved wealth on something that might be worth a lot less next year and not generate the cash flow it has recently? Isn’t financial freedom having assurance that your cash flow will always be coming and your principal will not be “decumulated” over time?  There is risk in any investment, although I argue that risks are significantly mitigated using the Ballast process.

1  “A History of Interest Rates” by Sydney Homer & Richard Sylla, Bloomberg

2 Bloomberg

Know what you own – and does it matter?

How many people really know what they own? We ask this question with the purpose of encouraging people to pause (sit quietly) – and ponder this question.

When time is seemingly in short supply, even in today’s hyper-productive technologically improved society, it seems our attention and knowledge has been hollowed out by tweets, snaps, and soundbites.  As long as someone says – ‘ yes, the price of what you own today is higher than what it was yesterday’ – we don’t spend much time thinking about it.

However, what happens if one morning you wake up and someone says the price of what you own is 20% less than what it was yesterday…

If that 20% translated into thousands, hundreds of thousands or even millions of dollars, that information might cause you to spend all day thinking about what you own.  From our experience, that ‘market information’ or opinion of value is entirely subjective. If what you own: generates cash flow, has economic value, is accretive to achieving an investment objective and is properly sized in a portfolio, then it doesn’t matter.  DO NOT translate this last point into ‘invest for the long term’ or ‘dollar cost average’ or some other ‘stay the course’ statement.  We abhor ‘dollar cost averaging’ and ‘decumulation’ statements because we don’t believe your investment success should be based on whether you “die at the right time.” These statements seem to originate from people who don’t want to bear any responsibility for assessing value, don’t want to take the time to opine on value and really shouldn’t be in the investment management business.  

At Ballast – we know what we own. Full stop. On any given investment we spend hours, days or even weeks evaluating whether we believe it is priced right and will work towards achieving your investment goals. If you don’t know the asset and the value of that asset – how can you really know what you own?

Our Goals for your Financial Success in 2019

As we enter 2019 and people lay out their goals for the year, we thought of highlighting some themes, or goals, we have for your capital this year.

As you may know, we are not very concerned with the market return. However, for reference, the market’s total return, as measured by the S&P 500 in 2018, was -4.37 (minus 4.37 percent). In comparison, we continue to build out portfolios with line items (investments) that generate reliable cash on cash returns.  Depending on what type of investment they were (investment grade debt, strategic debt, equity, alternative, etc.), cash on cash returns per line item in 2018 ranged approximately from 2% to 18%. Many of our clients sought returns of 6-7% from their portfolio, and these investments were blended together to meet their objective. This was done all while avoiding much of the market volatility experienced through other investments conventionally used to achieved these returns.

With that, our goals heading into the new year are to:

1.Continue our investment process that seeks to build portfolios, generating cash-on-cash returns in the 6 to 7 percent range

Regardless of market returns being up 10 percent or down 10 percent, the cash flow of underlying securities accumulates (hence our agnosticism as it pertains to worshiping the market gods…)

2. Continue seeking opportunities with double-digit total return profiles

Some investment objectives (even with strong cash flow yields) require greater returns – as does our own personal capital we manage. Therefore, we are always on the lookout to acquire assets that we feel offer attractive risk/reward

Examples of this are owning an office building in Bloomington, Minnesota and secured lending to a cellular tower owner/operator in Ohio. Both situations are currently yielding double digits and provide equity upside.

3. Apply an institutional risk management process to mitigate downside risk in portfolios

Our risk management process sizes each investment by numerous qualitative and quantitative factors including type, quality, and objective of investments.

4. Improve our portfolio reporting process

We are currently investing money into a portfolio reporting system that we once utilized while at a life insurance company we were once employed at. Our goal is to provide clients easy-to-digest portfolio reports, as well as more clarity in the construction of your portfolio.


We think if we can achieve solid cash on cash returns and find/acquire value-add ideas, while properly managing risk and reporting all this to you in a clear manner, then 2019 will be a successful year (regardless of whether or not the S&P has a successful year)! To take a look at what we accomplished in 2018, click here.