New England Potatoes
Vol #145: September 7th, 2023
Driving in rural New England, every encounter with oncoming traffic is a 10,000 pound negotiation over who can come closest to grazing their passenger side against the neighbor’s pachysandra shrouded rock wall.
Most of the back roads don’t have a painted line down the middle, and even the numbered state highways will plunge you down the backside of a mountain before taking a hairpin turn back up.
If you can take your eyes off the road for a split second, some of the oldest houses in the country dot the landscape. New England style barns abound (distinct because of the doors under the gables), red and yellow storehouses marking the old post road.
Fields wander down embankments, and overgrown underbrush shimmers with endless shades of green. A land before combines. The grotesque vernacular of “Modern” is absent – they’re just farmhouses here.
Each plot is delineated by the dribble of head and shoulder sized boulders. These reasonably straight lines run up and down the highways and still constitute official property lines. The locals call the rocks “two handers” because the stones that make up the walls can be carried by one person –using both arms.
Left after the last ice age, the stones and the walls they have built are an iconic representation of New England. With farming and the “beef, butter, and bacon” economy booming, settlers gobbled up as much arable land as they could. Nearly 70% of the region was farmland at the peak of the 19th century. The only thing in their way was the seemingly endless font of rocks.
Due to the annual frost heave, even if a farmer had cleared the land in the fall, by spring there would be new granite surfacing. Absent any other explanation, they assumed this was the devils work, and went about doing the best they could with what they’ve been served. When life gives you rocks, build stone walls.
Clearing these rocks made for one of the largest decentralized building efforts ever. At one point it’s estimated there were nearly a quarter million miles of stone walls across the northeast, which would have amounted to 400 million tons of stone, or enough to build the pyramids at Giza 60 times over.
It takes the amateur gardener only a few minutes before stumbling across pebbles of their own. Planting, hoeing, or weeding; they’re everywhere. Perfect for patching up the nearest wall - usually only a stone's throw away. These quaint boundary markers are a lesson in recycling and reusability.
The purpose of tilling a field is to clear it of all the items that make it difficult for your delicate crops to grow. Rocks get in the way of a plough, but they’re nowhere near as threatening as the general class of plant life known as weeds.
Unwanted, prolific, alien intruders. They come in all shapes and sizes, and share one thing in common - an unslakable thirst for your mulchy nutritious topsoil.
Turning over a flower bed at the end of the season is a cathartic practice, but it’s rarely at the top of anyone’s to-do list. Like pushing yourself to exercise, it’s something we all know is good and necessary, but requires additional motivation.
At the risk of being the guy who gardens once and writes a blog about weeding your portfolio, I’m going to do exactly that. This is The Till after all.
Hi, Mark here.
I’m going to interrupt this edition of The Till to ask you a favor, loyal reader. I am grateful for each of you that opens this newsletter each week, and I’d love to expand that. Is there a colleague or friend that you think would enjoy this?
If you share with 5 or more people I’ll send you a Harvested Financial trucker hat. (Send proof and your address to mark@harvestedfinancial.com). It’s perfect for weeding.
Back to our regularly scheduled programming….
The first thing to adapt is a spring cleaning mindset. The cleaner is different from the builder or operator. He must look at things not with an eye of what they could be, or how they can be handled better; but with a ruthless hatchet for cruft and plaque.
As part of a periodic review of your investments, it’s important to take a critical look at what is driving returns, what needs rebalancing, and what needs to be thrown away. If you’re trading a large options book, what are you paying theta on that isn’t working? As interest rates have climbed, how has that changed the dynamic of any floating rate payments you have?
In personal finance this extends beyond the brokerage account. Investment returns are only half of the equation, and also the side that is completely out of our control. Expenses however can quickly be pruned and adjusted. FuboTV was “only” $70 a month when you signed up, but the World Cup was almost a year ago and how much of the Premier League have you actually been watching?
Don’t be afraid to cut too deep, there will be collateral damage and that’s okay. You don’t need to approach the rhododendron with a blow torch or the hydrangea with a scythe, but just slip on some rubber fingered gloves and knuckle up with the roots. You’re going to have to pay transaction costs to rebalance. It takes time, energy, and PFOF to spruce up your holdings.
Weeds survive by consuming the shared resources faster than the ornamental lilies one so delicately planted. Mother nature’s version of the tragedy of the commons; a life and death battle for earth, water, and sunlight.
To do this, some will shoot roots into the ground all along their ropey tendrils. Others will push out bushy lettuce folds of green to maximize coverage. Still others will wind around branches and slowly choke out their host.
The metaphor here is to look at your holdings and make sure one isn’t squeezing out another. Are you borrowing money at a higher interest rate than you're getting in returns? Does your single stock purchase of NVDA or AAPL account for the fact that these are already meaningful percentages of index holdings?
Particularly with options, these exposure can change quickly. If you sell a covered call because you think volatiltiy is expensive and the trade-off is worth it, at trade time you have a given exposure. There’s a couple bucks worth of theta in there, and some meaningful delta offset (popular levels would be 20-30) against your shares.
If stock drops, your position doesn’t look exactly the same. Depending on how close it is to expiration, a good chunk of that theta will evaporate and the delta offset goes to zero. Sure you got some premium but your position is acting pretty naked right now.
To tend to this situation, a little pruning is more appropriate, where the call can be rolled out to another month to capture more premium, or even closer to the money. (Be careful of ‘middling’ where you buy the stock for $10, then sell calls at $9 as it drops only to lock in a loss if it rallies back.)
What’s impressive about the green crusaders, is how fast they take root. A few ounces of root mass will propel dozens of yards of vine. Garden sores metastasize quickly. Every weed starts small and will grow as rapidly as lackadaisical lets it.
It’s as if the regular plants are working on arithmetic scales while weeds are compounding geometrically. Don’t let expenses compound faster and faster. Pay off the highest interest debts or theta bills. Volatility is like anything else - it can be dirt cheap and still an overpriced debit.
There’s no right order to weed, but a good place to start is with the biggest and closest thing you can get your hands on. Sort your assets by size, or options portfolio by vega. What’s the biggest thing there, and does it still make sense?
Survey the terrain from a high vantage point and get things mostly in line. The broad side is the first part of the barn to raise. With the biggest stalky and pointed mess out of your way, you’ve got momentum to tackle the next obvious problem.
Markets are as cyclical as the seasons, we just don’t know their duration in advance. The build, boom, and bust pattern will repeat itself as long as humans and the machines they’ve designed are looking to price and exchange assets. Whether it’s springtime showers or zero interest capital, rain is good for everyone. Weeds flourish just as much as perennials during a robust growing season.
Good times make it easier for cruft to get into your portfolio. COVID cash fuels alt coin rallies and rosey SaaS theses tempt the endless flow of bonus checks. Better weather gives you all the more reason to tend to the garden.
Turning over the garden, not everything will be a weed. When you come across a New England Potato, build a stone wall.