Military Investment Series Conclusion: Where TSP Falls Short

LEH is trading for $395 a share! Only on

On Tuesday, September 16, 2008 Lehman Brothers Inc. was removed from the S&P 500 index, because they made a few bad moves, and caused some people to loose a few bucks. Index funds including C Fund managed by Blackrock were forced to sell their holdings of LEH between $3.95 to $0.30 a share from when the announcement was made on the 15th till it was de-listed from the NYSE on the 17th. They then had to buy up Harris Corp. (NYSE: HRS) to match the new S&P 500 index. For those paying attention shares of Harris Corp on Sep 19, 2008 had a massive spike of ten times the normal trading volume at 18,499,000 closing up 1.80% in value. If you were a front runner you could of snatched up this stock before it was included in the S&P 500 Index Funds. Keep in mind picking what stock is to be included in the index is as easy as knowing what Oprah would pick for her book club. The S&P pick process is still very non-mathematical and done by human committee.

So what happened? Why were we forced to hold LEH until it was too late? Just 19 months before before that, on February 2007 LEH reached $86.18 a share, giving Lehman a market capitalization of close to $60 billion! Even if you were some savant and saw this shit show coming, your stake in C Fund held on to LEH until it lost 99.9% in value. We had to do this because those were the rules set up in the prospectus for C Fund. The C Fund seeks to replicate the Standard and Poor’s 500 stock index regardless of how detrimental the venture may be.

The inability to trade single stocks when you want is the biggest downfall of TSP, we are helpless to hold onto companies that are sucking it up. Just like being a passenger on a crashing plane, knowing what would happen,  but not being able to do anything about it. Just find your happy place and wait for the dust to clear. Don’t Panic! On the flip side you can’t buy up more than the market weight of a single company, even if you know this company will outperform. The fund owns 500 companies based on market capitalization and weight that is unvarying from what the index is assigned.

However the value of the TSP funds is they are dirt cheap and diverse at least in the American stock market. Everyone is a robot on the management side of the fund. No decisions have to be made, the manager just does what the represented index does. No more thinking, it’s the quick pick lotto ticket of the investment world. You know it doesn’t matter what stocks or lotto numbers to pick, so just have the computer or some company do it just to have skin in the game. You do this because you know there are no lucky numbers or single winning stocks. You just need to buy in anyway you can.

What stocks make up the 500 comes down to the decisions of Standard and Poor’s committee on picking the constituents of the S&P 500 Index. There are just a few criteria to make a company eligible:

  1. Market cap should be $4.6 billion or more
  2. Stock should be liquid with at least 100% annual turnover of float shares
  3. U.S. based company traded on a major stock market
  4. Public float greater than 50%
  5. Financially viable by showing four consecutive quarters of positive earnings
  6. Contribute to the maintenance of the sector balance of the index compared to the market based on the market value of the ten GICS sectors.

Once a company is in, it is not too easy to get kicked out.  If a company’s market cap drops below the $4.6 billion initial requirement or not sustaining 4 quarters of positive earnings, that doesn’t mean immediate ejection. Usually a spot opens up when a company merges with another or in the case of LEH, goes bankrupt. When this happens one lucky company goes from the S&P 600 into the 500.

Remember these 500 companies are picked to approximate the health of the stock market. The Index is not intended to be a smart or well thought out pick of companies that will make money. It is rather a statistical basket of random-ass stocks picked by old farts to compare the performance of mutual funds. Jack Bogle was the first savant to write in a 1951 Princeton senior thesis to just say, fuck it, let’s just buy every company in the benchmark index instead of trying to beat it!

This was very radical thought at the time, because in 1951 there were no dumb money traders like housewives, bros, millennials, and old Asian ladies as retail investors that can make trades on their iPhones any time of the day. Stock market traders were serious men with serious suits that made serious stock picks. There was a art and craft to picking stocks and managing mutual funds. These real men took pride in their voodoo science.

Jack Bogle’s was undergraduate student saying to these old men: “you suck at your job, just buy all the stocks of the index like a robot”. This thesis was not given much thought and considered heresy, but that little punk just went with it and founded Vanguard based in this cheap index concept. This seemingly stupid idea became the first publicly available Index fund in 1975. This passive fund was cheaper than the rest since it was so mindless to manage. After 40 years of index funds, Vanguard has out preformed lots of managed funds, and birthed an annoying generation of Bogleheads and value investors that can’t shut up about it.

In 40 years his 1951 thesis was proven right, indexing had simply done better than more than half the shit funds out there. This completely unrelated Index that was meant for benchmarking became the hot new fund that we are all flocking to dump our entire life savings into. It was never made to out preform anything, but rather be the minimum that these asshole fund mangers are hell bent on trying to beat.

Unless your front running, you really should not care what 500 companies are picked. In fact I made a list of companies and I don’t even know half of them. The power of Indexing comes in numbers and not timing. This is good because when LEH failed, there was 499 companies that didn’t. We spread out our bet and we didn’t have to suffer a massive loss. We had enough capitol to live another day. In roulette, don’t put all your chips on black for a single spin, just pick a few numbers in the middle so you can afford future spins.

Conversely if you had an actively managed fund, with a lot of turnover, you have overpaid manager has to make some decisions. They make a bunch of trades, but this high fund turnover eats up earnings in terms of trading and management fees. Worse is, if other fund investor sell because they panic at the bottom, then the fund managers have to sell securities at bad times in order to pay out people leaving the fund. This is impossible for these TSP funds because your $18,000 you put in a year is a fart in the wind compared to the overall capitol of each fund. These are incredibly low turn over funds with very little outflow. Or as Davey calls it a “big ass low turnover fund”.

I am not discouraging investment out of TSP Funds, but for many of you casual investors you need to really fill up the TSP pot with $18,000 for a legit retirement first before doing your stupid YOLO bets on 3x Leveraged ETFs. You really need to think of TSP first before running off with the next “Financial Advisor” that wines and dines you.  If you do fall for him or her, just be aware that the 5 funds of TSP are awesome and cheap and just buy stuff that doesn’t overlap the investments that TSP gives you for 29 cents per $1,000 with no out flow or inflow fees.

This is where TSP falls short:

  • C and S Fund: only every American stock at one time
  • I Fund: only large companies of industrialized countries
  • G Fund: only 2% loan to the federal government not adjusted to inflation
  • F Fund: Only AAA to BBB- bonds that are too low on yield

If you are interested in investing in anything else then you should invest in it outside TSP. Just keep your eye on fees and consider a discount broker like Robin Hood, Vanguard or Charles Schwab to save on fees.

Here is my dream fund would be Global market completion fund that is Cambria Global Asset Allocation ETF (GAA) minus the TSP components for total global diversity.

The theoretical funds to fill the TSP hole on my wish list:

  • M Fund: Mini and Micro cap and penny stocks, de-listed OTC pink sheet companies
  • W Fund: International Mid to Small cap companies of developing economies
  • IG Fund: Any government debt that is not USA, preferably for a country that needs it
  • J Fund: Junky junky bonds of risky BB rated and below company debt
  • D Fund: Derivative products on commodities
  • Au Fund: Commodities
  • H Fund: REITs
  • WSB Fund: whatever /r/Wallstreetbets says
  • MLP: Master Limited Partnerships
  • T Fund: TIPS: Treasury Inflation Protected Securities (G fund adjusted to the fed rate)

Also all of this money in these funds I am prepared to lose since its so damn risky, minus the TIPS fund which should be a replacement to the G fund. If you want to retire for cheap stick with TSP, don’t get suckered into doing the same investments in the retail world at a much higher management fee. If you want to gamble then hit the horse track, casino, or invest in these product listed above (minus the T fund), just be prepared to lose it all.


4 thoughts on “Military Investment Series Conclusion: Where TSP Falls Short

  1. Dave says:

    By the beard of Zeus, I want in on the WSB Fund.

  2. Trainwreck says:

    The WSB ETF would be like 3x 100% $SUNE re-balanced daily. I would love to see its Morningstar analysis

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