Half Year ReportFour and half years ago when I discover the secret of arbitrage, I decided to first apply it to my retirement income portfolio (Roth IRA) but in a unique way because as a student of the markets and industrial engineer myself. I have a particular way of thinking when it comes to income investing. Today I am going to share with you my results, holdings and performance for my Roth IRA as June 2014.

 

“Risk comes from not knowing what you’re doing.” – Warren Buffett [Read More…]

Post image for How the Famous Puerto Rican Boxer Felix Tito Trinidad Went Bankrupt and Lost All His Money

Who is Felix “Tito” Trinidad?

For those of you who do not know who Felix Tito Trinidad is here is brief recap of his story. Juan Félix Trinidad García is the most successful professional boxer in the history of Puerto Rico and a childhood hero of mine. On and all his record stands at 45 fights, 42 wins and 3 losses. Beating legendary names like Oscar De La Hoya and Héctor Camacho. His middleweight championships titles include the World Boxing Council WBC, World Boxing Association WBA, and the International Boxing Federation IBF. On total, he has reported over 86 million dollars of fighting wages with revenues numbers per fight that look like this:

FightsPurses
Pernell Whitaker$2 millones
Oscar De La Hoya$12 millones
David Reid$4 millones
Mamadou Thiam$6.5 millones
Fernando Vargas$8 millones
Bernard Hopkins$2 millones
Hacine Cheriffi$2 millones
Ricardo Mayorga$10 millones
Winky Wright$9 millones
Roy Jones Jr.$15 millones

How Tito Lost His Millions

However, the story I want to tell you today is how he lost his fortune investing on the risky game of “professional financial advisors”. Currently the boxer is fight a battle in the justice department of Puerto rico suing Banco Popular Inc. (BPOP) for improper management of funds and poor oversight; because of legal responsibilities of José “Pepe” Ramos and Popular Securities.  About the poor investment decisions they took with the money of the celebrated boxer. Without having, direct access to Felix’s books and based solely on press reports and publicly available information let me try to describe to you how it was that they lost “ALL” his money.

tito tribunal

How They Invested Trinidad’s Money

The biggest reported issues with the investment they did are the use of margin, and the lack of diversification investing heavily on Puerto Rico Debt Paper via illiquid close-ended funds (Municipal Debt CEF). If you are not aware, Puerto Rican Bonds have been under pressure for the last few years and are now mostly rated as junk bills. To put this in perspective let’s take a look at the following chart (EV Municipal Income Term Trust: ETX ) as an example of performance because it holds the Puerto Rico Elecetrca Pwr Auth 5.25% 5.25 01 Jul 2030 Bond:

“Bonos de la Autoridad de Energía Eléctrica de Puerto Rico PREPA – AEE”

 

ETX Returns

 

However, that was only for illustration purposes. Because the funds that most likely Tito holds are the Puerto Rico Investors Tax-Free Funds close-ended funds such as:

 

Puerto Rico CEFs
Now keep in mind that the initial public offering  prices of these funds were $10.00 and now they are trading under $5.00, which is a loss of over 50%. Nevertheless, the worst part about this investing strategy is the poor use of the dividends payments. Accounting for the worst-case scenario and with the lowest distributions on record of $0.0488, pay monthly over the last 13 years. The total distribution received was $7.63 for a total market return of 26.3%.

However, the official fact sheet reports a market return of 2.47% since inception.

 

Puerto Rico CEF UBS
Now imagine that you are holding those positions on margin and every time they go down instead of selling them and taking that first and best loss your meeting the margin calls and taking loans in order to keep holding those funds. Is ridiculous to keep investing that way; right? Well it did continue to happen and from the approximately 90 million dollars of initial investment capital, he is now down to less than $20 million and with debts balances that overshadow his equity forcing him to start the process of declaring bankruptcy.

 

But What If He Had Invested His Money the Arbitrage Waybankruptcy book

Humor me for a quick second because I know I will be using the benefit of hindsight. But let’s say we use the model that I teach inside the Arbitrageur Investing System and invest only half of his initial capital around 50 million dollars; with the goal of lasting at least for the next 30 years:

1. Incorporate and do not take on personal debt. Personal bankruptcy protection.

- As we all know investing under a corporate structure have many advantages and protections over investing inside a taxable personal account.

 

2. Create a certificate of deposit CD and protect your money. Leverage the free investing capital of a business loan guarantee against that CD.

- Having your money gaining interest without risk inside a CD,  is better than risking it all in the markets. Not to mention all the gains we will have after performing the net interest margin trade.

net interest margin trade

                                                                                              cd loan calculator tito

- That is over 17 million dollars of riskless profit given a CD yielding 3.5% and a loan at double the rate of 6.5% over the desire average longevity of a retirement income portfolio 30-year.

 

3. Do not invest all you money at once on a single name. Diversification and increment buying, resulting in a lower average cost of acquisition. Never meeting margin calls.

- Now let us really arbitrage this trade.  We know as a fact that either good or bad the management of the of Felix’s funds were conducted by two identities UBS Investment Bank and Popular Securities (Banco Popular de Puerto Rico and a subsidiary of Popular Inc.)

Thinking like investment bankers let see how we would have done if we had invested directly to the source, the common stock of (USB & BPOP).

 

Bpop vs ubs

 

- Well, that is a negative return in both cases no better than investing in those Puerto Rican CEF. However, remember that we invest for income no for speculation and using preferred shares is one of the best ways to really get a positive performance. Investing instead in Popular 6.7% Cumulative Monthly Income Trust Pfd Securities (BPOPN); would have equaled $16.74 of free dividend payments or a market return of  66.99% over the last 10 years.

 

BPOPN vs BPOP

 

- Now applying the full strategy of the Arbitrageur Investig System – AIS. We could achieve a 6.33X return for a final portfolio value of $366,612,860.29; in just 30 years with yielding assets of (3.25%, 6.70% & 6.5%) using only 50 million dollars “half “of his investment capital. Turning his money into a  fortune worth more than a quarter of a billion dollars.

 

AIS tito numbers

 

- How about we go down a level deeper with this analysis and create a case study that will represent the ultimate investment strategy.  Take a look at the official SEC filing documents of the Puerto Rico Electric Power Authority (Power Revenues Bonds) and Popular Inc  (Popular Capital Trust I). Notice that the most prominent bookrunner name they have in common in both cases is Citigroup. So let run the numbers investing in Citi (C) , remember no in the common stock but the preferred shares (Citigroup 8.125% Non Cum Redeem Preferred C-P).

 

1 level down propectus

 

- Again applying the full strategy of the Arbitrageur Investig System – AIS. We could achieve a 9.75X return for a final portfolio value of $537,645,291.44; in just 30 years with yielding assets of (3.25%, 8.125% & 6.5%) using only 50 million dollars “half “of his investment capital. Turning his money into a  fortune that will now be worth more than half a billion dollars.

 

AIS tito numbers half a billion

 

- How about we go down even deeper with another level of analysis to maximize for highest returns possible at lowest risk available.  On the figure above where we highlighted the investment banks involved in the transactions of  the initial public offering of the securities we found that there is another big institution in the mix. In fact according to the market capitalization it is the largest bank in America and Warren Buffett’s highest weighted portfolio position. So invest in Wells Fargo 8% Non Cum Redeem Preferred WFC-J.

 

wells  bufffet tito

 

WOULD YOU LIKE TO LEARN HOW TO PERFORM THIS SAME ANALYSIS TO YOUR VERY OWN INVESTMENT PORTFOLIO? DOWNLOAD THE FOLLOWING FREE INVESTING MINI-COURSE AND DISCOVER HOW

 

minic-course

November ReportJune  2014,  was a very busy month for the business aspect of the blog.  Meanwhile, as the market kept flat I continue to increase the income yield of my portfolio.

I share my results with you mainly for three reasons:

  • The Benefit of Full Disclosure
  • Share the Knowledge
  • Track Performance

 Because “no one should talk about investing, if they are not willing to show their actual holdings and performance.”

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