Inklette Magazine's Conversation With Sergio Troncoso

A very in-depth interview (perhaps my most revealing in many years) with Devanshi Khetarpal of Inklette Magazine. Thank you, Devanshi, for the conversation.

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“A deep freedom of consciousness,” Sergio says, “is what writing is about.” “Damn even yourself,” he says and advises writers not to fall for their own proclivities, judgements and tendencies. He wants to ask the toughest questions of himself, as much as he asks them of others around them and that’s why he loves writing. He said, “Let me be blunt. I don’t even think I know myself.” It’s a huge admission to come from a writer, and it is difficult to do what Sergio wants writers to do: to turn the lens onto our own selves as we do towards others.
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https://inklettemagazine.com/2022/07/19/a-conversation-with-sergio-troncoso/

Financial Chess

Tomorrow I will make another financial chess move.  We are refinancing the mortgage on our house, to a super-low interest rate, at a shorter term. We close on the deal in the morning.  My father often criticizes me for “always worrying about money,” but discovering a financial advantage and having the guts to take advantage of it have been the ways in which I have gained my economic freedom.

During the nadir of the financial meltdown in March 2009, I was smart enough not to panic, even though I worried about my investments and what my wife and I had achieved, in stock gains, over many years.  As the market came back over the past year, I vowed to take into account that worry.  I sold stock, and Laura and I decided to use those gains to pay down our mortgage and so shorten the years of our mortgage debt.

When I was younger, I had almost 100 percent of my investment money in stocks, stock mutual funds, and only an emergency fund in bonds.  As I have gotten older, and with the experience of 2009 fresh in my mind, I have realized I want to preserve more of what I have, and not to focus only on growing it.  So I adapted.  Adapt or die, I say, to any would-be investor.

Yet the bonds I have purchased have been on the short-end of the yield curve, because I expect interest rates to go up.  They can hardly go down any further, so the best bet is that they will either stay stable for a while, or go up.  When interest rates go up, the prices of bonds go down: an inverse relationship.  So any bond that is long-term (i.e. greater than ten years) will be hurt more by a one percentage increase in interest rates, than a bond that is short-term (less than three years, or just one year).

Another financial chess move I have made over the past three years is to increase my foreign stock allocation.  When I teach an investment analysis course, I always give my class the current total stock market capitalization of the world, and what portion belongs to the United States.  Since the 1970s, the American share of world stock market capitalization has declined.  The world outside the U.S. is growing faster than the U.S.  Brazil, India, China, and South Korea are great growth stories.

Even individual American companies I purchase for my portfolio I examine in light of their foreign revenues: companies with their eyes on foreign markets will simply have less of their eggs in one (domestic) basket.  If you think our budget and trade deficits will have a negative effect on the dollar (I do), then you will benefit by having companies earning their revenues in Euros, Yuan, Won, and Yen.

I also expect taxes to go up.  Why?  We have these gigantic deficits and lack the political will to tackle spending on entitlements and the military nationally, and on state and city government budgets and bureaucracies locally.  I blame both Republicans and Democrats for this situation, and think they will come together when they are forced to come together.  Crony capitalism on Wall Street and dysfunctional politics in Washington have left us in a mess, but I don’t think it’s the end of the world.  I believe the Tea Party activists are overstating their case.  I see reported profits for S&P 500 companies higher than expected, and perhaps there is a chance we can grow out of this deficit hole.

Right now I would vote for Obama again.  Why?  He has been pragmatic when faced with the economic cleanup of the Bush mess.  Obama has forced consumer protections on credit-card companies and is actually regulating, as the government should, the practices of financial institutions which drove the American economy into a ditch.  The laissez-faire, I’m-a-deregulator philosophy of Bush allowed the powerful to take advantage of the weak and uninformed, and the well-connected to seek a public bailout when their crazy risks exploded in their faces.  And ours.  We can’t let that happen again.

Know Thyself and Buyer Beware

Know thyself and buyer beware. These are phrases I not only preach but also practice, particularly when I make financial decisions each year. I have been talking about the importance of financial literacy with friends and also leaders in the Latino community. Here are a few thoughts.

I believe in self-honesty and knowing what you don’t know, self-education, and self-reliance. Let me take the last first, and tell you why and how they apply in becoming a financially literate individual.

Self-reliance. When I graduated from Harvard in the mid-1980s, I had no money, I was in debt, and I was about to enter graduate school at Yale, to assume even more debt and continue my education. I watched every penny. My bed for years was cinderblocks I found on the street covered by an old sheet of plywood and topped by a thick piece of foam. I saved money, even while at school, and opened my first money market fund.

Self-reliance and my cost-cutting ways were my methods of increasing the amount of capital even when I was earning small salaries as a teaching assistant. Yet even then, I knew that unless I made my savings grow, I would never go beyond a hand-to-mouth existence. So I also began investing in mutual funds. It was the beginning of one of the greatest bull markets in history, so I was also lucky.

Because I used my own investment money, no committee had to be consulted, no outside investor would ring my phone in the middle of the night to cry about losses, and I could choose out-of-favor or even unknown companies (except to me) and invest in them for the long-term. Self-reliance also meant patient money.

Self-education. As I invested, I also began to read. Benjamin Graham. Peter Lynch. Ralph Wanger. Warren Buffett. Barron’s and The Wall Street Journal. John Bogle. Jeremy Siegel. Philip A. Fisher. I am still reading books about investing, by investors and fund managers, and professors of finance. I also taught myself financial accounting, by reading accounting books. I wanted to be able to read and understand 10-K reports and annual reports, and how companies work to make profits.

But my education was not just book-learning. As I invested and learned on the fly, I saw how the financial press was manipulated by many mutual fund companies that trumpeted ‘stellar funds’ with great short-term records, only to have these same funds explode with assets the next year and the managers produce mediocre returns or leave for more money to other fund firms. These ‘stellar funds’ also carried high costs: win or lose, the fund managers still made money for themselves.

Costs matter. Costs are permanent. Invest in index funds, which are the lowest cost funds, particularly at a place like Vanguard. Index funds also have no prima donna fund managers. Buy three or four index funds that represent the stock and bond categories you want to be in, and that should be the plan for the majority of investors who are passive. Passive simply means you are not buying and selling individual stocks, you don’t have the time and inclination, and it’s better to know what you don’t know and invest in index funds. Investing is Socratic: those who don’t know who they are as investors will soon be ripped off by manipulators who appeal to the greed and vanity of the hapless.

Self-honesty. I made many investing mistakes. In my early years, I invested with ‘stellar stock funds,’ which soon tanked. Taco Cabana, another mistake. Stay away from restaurants and airlines. I know certain industries pretty well, but others are too difficult for me to understand, or too unpredictable as businesses. I stay away from what I don’t know, and if I want to know I do hours, even years, of homework.

I have not made many mistakes selling; I don’t know why. I do have a sense of when to get out when I have followed and invested in a company for years. But I have made mistakes buying early, a bit too high, for example. Over-enthusiasm. In a market rout, I don’t panic. I have thick skin, and I don’t report to anybody on my investments. Last March, the nadir of recent stock market valuations, I was indeed worried, yet I stuck to my individual stocks and index funds. I did nothing, which was the smartest thing I did all year.

Investing is about being efficient with the extra capital you have. Invest it well, learn who you are as an investor, and make saving money your constant priority. Then investing will be your path to independence.

Investment Analysis

I am updating my syllabus and preparing to teach Investment Analysis at Yale this summer. I am an oddball who writes fiction and teaches investment strategy. I was an economist for a short period; I love writing short stories and novels and even teaching the occasional short-story workshop. Yes, perhaps I am a bit schizoid. But I became interested in investing the few dollars I had during and immediately after college, because I had relatively little money and I wanted more. I didn’t want the riches; I wanted the freedom. I love being my own boss, and that’s exactly what a fiction writer is, as well as an individual investor. I also love numbers. Go figure.

In my course on Investment Analysis, I have students read favorite investment practitioners like Ralph Wanger, John Bogle, Jeremy Siegel, Benjamin Graham, David Swensen, and of course, Warren Buffett. The Essays of Warren Buffett is perhaps my favorite book. I teach my students how to analyze income statements, cash flow statements, and balance sheets for different companies, by looking at actual 10-K reports and annual reports.

I believe in learning by doing. The more actual companies you look at, the better you will understand the industry, and which companies are well-run, and why, and which waste the company’s capital, your money. If you keep looking at companies year-round, when the right opportunity comes along, you can analyze it at lightning speed and make a decision about investing in it. ‘Toochis ofn tish,’ a Yiddish phrase for ‘ass on the table.’ Skin in the game. Put your money where your mouth is. These all mean the same thing: if it’s your money, you will take the risk and you will have the responsibility for the decision.

There is one way in which literary writing and investing are similar. The more you write, the more you can write. The more you live in the writer’s world. The more a certain type of focus becomes your normal state, rather than a special state for the weekends, for example. Paradoxically, the less you write, the less you will be able to write. The less you will be able to pounce on a set of ideas when they strike you, at the oddest moments. So writing, like investing, is learning by doing. You have to practice both to become adept. That’s one of the reasons why I started this weekly blog, to keep my literary motor hummin’.

I tell my Investment Analysis students that, yes, you need to love the detail of financial numbers, and you need to be infinitely curious about companies, their stories, why someone would take such a risk, against all odds, to survive and thrive amid brutal competition. But beyond having abilities in number-crunching, I tell them, being a good investor is also about character.

Certain character traits are excellent for an investor. Other traits work against you. You need to be an independent thinker, and not give a damn what the crowd thinks. Particularly the Wall Street crowd. You need to be able to check how you react emotionally to money, not too excited when your stock is going up, and not too depressed when it’s going down. This emotional distance is crucial for taking advantage of opportunities. Buffett: “Be fearful when others are greedy and greedy when others are fearful.”

People who invest in the stock market and are not self-aware, or acutely aware of what the crowd does and why, will be fools soon parted with their money. Crotchety. Detail-oriented. Fiercely independent. Industrious. Relentlessly curious. That's the makeup of a good investment character.

Cinco de Mayo: A Victory for the Underdog

One of the many hats I wear is that of an investor. For decades, I have invested in the stock market, beginning after college when I had saved a few thousand dollars. I enjoy the number-crunching of investment analysis, finding undiscovered small companies, and putting my money where my mouth is. It is always a challenge, and I have made mistakes, but I have also returned to my mistakes to learn from them. Serious investing is investigative and practical. It is also a recursive process in which you are constantly evaluating your premises for a particular investment, as well as your evolving skills and sensibilities as an investor.

One of the things I learned about myself, during this vicious bear market, is that I need to increase my allocation for bonds in my overall portfolio. There is nothing like a heart-thumping drop in the stock market, month after month, to force you to reevaluate your strategy. I did not sell any individual stocks or mutual funds, so I did not panic and I have benefited from this bounce back from recent lows.

But in March I did feel financially vulnerable, since in four short years my older son Aaron will attend college. Now that the S&P 500 is above 900 at least for a day, I won’t go back to my 80/20 split for stocks and bonds, but instead will keep adding new money primarily into my bond portfolio. I am focusing on short-term bonds, because I believe interest rates are at historic lows, and can only go higher. Short-term bonds will be hurt the least when this happens. Remember, bond prices go down when interest rates go up, and vice versa, and this relationship is more pronounced the longer the maturity of the bond.

I am a contrarian, and this belief in my head was indeed proven by what I did with my hands and feet. I did not panic as the Obama administration got a handle on the financial mess it inherited, and as credit markets froze and threatened to turn a deep recession into a depression. I did not panic as a few mega-banks teetered near insolvency, as deficits soared because of federal bailouts, as swine-flu hysteria gripped the nation. It is important to assess how you reacted in critical situations to get a sense of who you are. You don’t know what kind of soldier you are until the bullets whistle past your ears.

We are not out of the woods yet. Corporate earnings may turn more negative than they have been so far, or we may experience flat to weak economic growth for many years, or some unforeseen event, like a run on the dollar, may undermine financial stability. The second and third waves of past flu epidemics have often been deadlier than the initial wave. So I am still wary, but I have taken steps to take advantage of overreactions and to be better prepared for the next crisis.

I am a relentless cost-cutter, and this attitude has helped me to evaluate what we spend money on and whether it is worth it. This cost-cutting also helps me to be better prepared for crises: companies and individuals who are careful with their money and carry little debt are better able to weather downturns. That’s a truism we should live by as investors and as responsible parents.

Sometimes my writer friends, who are terrible at managing their own financial affairs, ask me why I worry so much about money. Invariably this happens a few days after they’ve asked for a loan. I tell them what I’ve always told them. Investing is not about getting rich, or having more toys, or impressing others. It’s about independence. It’s about doing what you want, when you want, and not having to ask an ornery friend or a boss for more money, and not getting it.

Cinco de Mayo celebrates the underdog Mexico defeating powerful France at Puebla in 1862. The individual investor is the underdog in today’s investment world. Do your homework, know thyself, and think independently, and perhaps you will also reap an unlikely victory. Happy Cinco de Mayo.

Writing and Investing

I have always had interests in two, somewhat incompatible areas: writing stories, often with philosophical questions in mind, and investing money. I tell friends who have known, or discovered, these long-standing interests in me that I love stories, language, immersing myself in working out hard philosophical problems and in creating characters to play out the questions in my mind, and I also love numbers, discovering the ‘story’ of a small company, and the detail work of finding a good business or management before many other investors do. But there is more to it than that.

Right after college and during graduate school, I had in my mind that I wanted to write what I wanted to write, without the pressures of writing what the prevailing commercial book market wanted of any writer, including a ‘Latino’ writer. I wanted to hone my craft in my own way; I wanted to keep reading Aristotle and Nietzsche; I don’t ever like being under anybody’s boot. Also, when I read what was routinely published, and promoted, at local bookstores, I did not want to have to compromise my work for the sake of making money. Perhaps this was too self-righteous and even stupid, but that’s me. I think I have mellowed over the years, but as my mother would say, “Eres demasiado terco.” I am too stubborn.

To pay for this cursed independence, to pay for not wanting a boss, years ago I began learning how to invest money. I finished finance and accounting books my friends who were in MBA programs recommended to me. I studied the annual reports of Berkshire Hathaway, read Graham and Dodd’s Security Analysis, read Peter Lynch and Ralph Wanger and many others. I began ordering annual and quarterly reports from companies, and to my amazement, every report arrived free, in my mailbox, and I just had to understand the company, the business, and find out as much as I could through the Internet. I did this, and continue to do this, for dozens of potential investments every year. Most of the company reports are now online. Alas, this year has indeed been brutal for my stocks, yet I am still surviving this bear market.

The stubbornness and independence that have propelled my writing have also informed my investing. I do not want to be part of the crowd, as an investor, or as a writer. I have little interest in the latest literary fad, or what will make a big splash at the bookstore, just as much as I have no interest in day-trading, or any other speculative way of making money. I do not market-time, as an investor, nor as a writer. My intention is to write stories that I hope will still be good stories ten years from now, and I buy shares of companies that I intend to keep just as long.

I am not sure I would recommend this path to any writer. I did it out of necessity, and perhaps because I also knew myself only too well (Socrates’ exhortation). I also did it because I like to work, and the value that work bestows upon my soul, and because I love doing my own work, in my own way. It is a cage, this self, and I have tried to make the best of my cage, to turn my weaknesses into strengths, and perhaps to make this cage into the key for my freedom. What else can we do?