I wrote the following letter toIMAclients, but I suspect some of you may find it of interest as you may have accounts at Charles Schwab, Fidelity, or TD Ameritrade.
We are sending this email to all our clients. We could have sent it only to those who have money in IMA accounts at Schwab, but in many cases our clients have assets outside of IMA management. Also, though this letter focuses on Schwab, we address TD and Fidelity as well.
We have received a few inquiries from clients expressing their concern about the safety of their money at Charles Schwab. Schwab has been in the news because the banking side of the business made investments into high-quality, long-term bonds whose prices have declined as interest rates have risen. (Please read the Spring Letter, where I discussed this subject in great detail.)
I could go into a very detailed analysis of Charles Schwab, but I won't waste your time. The situation is fluid; interest rates can rise, worsening the losses, and deposits can outflow a lot more, deepening the losses further.
I have to be honest; anything I say below this paragraph is a waste of your time.If there is an institution too big to fail, it is Schwab, which has over $7 trillion in assets. If Schwab goes bankrupt and even a single account holder's money is affected, we will have no economy or stock market. It is that simple.Account holders losing their money would be like dropping a nuclear bomb on the US economy. Investors losing money on the cash at Schwab would create a run on the bank (actually on the economy) like the world has never seen. Schwab's problems are less severe than those of many other banks, and if necessary the US government will bail out its depositors.
However, for those of you who have some extra time, or maybe just continue reading because you enjoy my writing, here are a few more reasons not to worry.
Your stocks, bonds, and money market funds are registered in your name. For example, shares of Philip Morris or Schwab Treasury Obligations Money Fund (SNOXX) are database entries in your name. Any securities, other than cash, are on Schwab's custodial side of the business, belong to you, and cannot be taken away from you, even if Schwab was to go bankrupt.
Cash, which is on the bank side of the business, has several layers of insurance. It is FDIC insured up to $500,000 per account registration; IRAs are counted separately from personal accounts, etc. There is also SIPC insurance of $500,000 ($250,000 counted towards cash). Additionally, Schwab has extra insurance that covers cash up to $1.15 million per customer. For more information, please see links at the bottom.
We are striving to keep as little money in pure cash as possible. Most of your cash is in the money market, which, as I mentioned above, is on the custodial (non-bank) side of the business.
All of my and my family's investable assets are at Schwab and TD Ameritrade. Lately, I have been losing sleep over my chess game (which is getting worse), but not Schwab's liquidity.Unfortunately, unlike Schwab, I am not too big to lose.
Regarding TD and Fidelity:
TD Ameritrade, merging with Charles Schwab later this year, is both FDIC and SIPC insured.At TD, we minimize the amount of real cash in your accounts by purchasing money market funds which invest in short-duration US Treasuries.
For clients with accounts at Fidelity; it does not have a bank. It is not exposed to the same type of risks as Schwab.Fidelity is also SIPC insured, with additional SIPC insurance covering cash up to $1.9 million per customer.
Here are a few more links for your reference:
IMA clients based outside of the US require a slightly different approach to ensure airtight safety of cash and securities.
International clients at all custodians are not eligible for purchase of money market mutual funds, nor are cash balances FDIC insured. However, these accounts are still SIPC insured for securities, and this coverage also extends to cash balances in accounts up to $1.15m and $1.9m at Schwab and Fidelity, respectively.
Further, because we cannot buy money market mutual funds the same way as for domestic clients, we will start purchasing a money market ETF (SGOV) that invests in short-term US Treasuries.
You can download a selection of my best articles from 2022 as a beautifully produced PDF in thislink.
Over next few weeks we’ll explore one of the most underrated figures in classical music, Alexander Siloti (often spelledZiloti, which is an accurate transcription from Russian). He is little known today, but there must have been something special about Siloti: Tchaikovsky, Rachmaninoff, Stravisnky, and Liszt all dedicated music to him.
I’ll divide our exploration into several parts. Today we are going to discuss Siloti and Rachmaninoff.
Siloti was born in Kharkiv, Ukraine (then Imperial Russia) in 1863. He studied at the Moscow Conservatory under Tchaikovsky. He had such great potential as a pianist that in 1880 Russia sent him to Weimar, Germany to study under the king of piano himself, Franz Liszt. Liszt did not charge for his classes, but the Russian government paid for Siloti’s room and board and even gave him 10,000 rubles for gambling! (I hope my son, Jonah, a student at CU Boulder, doesn’t get any ideas and will not start asking me for an allowance to play Draft Kings). Siloti studied under Liszt for six years until Liszt’s death in 1886.
We need to pause to explain the significance of Siloti’s studying with Liszt. The piano went through a significant transformation in the late 18th and early 19th century. Just as Elon Musk accelerated the transition from internal combustion engine to electric cars, Franz Liszt was the driving force that accelerated the transition of the piano from an instrument used for private performances in living rooms to a powerful orchestra of one whose sound fills large auditoriums. Liszt helped to transform the piano into a more robust instrument that could handle a much greater range of music – and tolerate more abuse from the enthusiastic pianist!
Liszt changed the way piano sounded by developing new playing technique and writing much more challenging and ambitious music for piano. He rewrote “old” music for the new instrument, transcribing Wagner’s operas, Beethoven’s symphonies, etc. Liszt’s piano started to sound like its own orchestra. I am just scratching the surface here. If this topic interests you, I wrote a more in-depth essay on Liszt and the evolution of the piano, whichyou can read here.
Back to Siloti. After studying under Liszt, Siloti taught for three years at the Moscow Conservatory. One of his students happened to be none other than his first cousin, Sergey Rachmaninoff. Rachmaninoff was born 1873, so he was ten years younger than Siloti (he was only thirteen when Liszt died). We will never know for sure, but can make an educated guess that Siloti was the likely link that connected Liszt to Rachmaninoff. Because of Siloti, Rachmaninoff’s piano concertos are very Lisztonian. They are incredibly technical and demanding of the performer and squeeze out every ounce of the piano’s might. Neither Liszt’s nor Rachmaninoff’s piano music was technically demanding just to tax the pianist. The increased difficulty was the price to pay for richer, bigger-than-life sound.
Let’s listen to the cadenza (solo part) from RachmaninoffPiano Concerto No. 3(one of my favorite concertos). Note that you are listening to just one instrument – a piano that sounds like a full orchestra.
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And then listen to Liszt’sSonata in B Minor(minutes 7–9). You’ll be reminded of Rachmaninoff, as the piano goes from being a lyrical instrumental instrument to suddenly erupting into an orchestra.
Now when you listen to Rachmaninoff’s 3rd piano concerto you can thank Russia for giving Siloti 10,000 rubles to go gamble in Germany and study under Liszt and then transfer his knowledge to his talented cousin Sergey.
Vitaliy Katsenelson, CFA
I am the CEO at IMA, an investment firm that designs all-terrain portfolios that survive the worst markets and thrive in good ones. (Get our company brochure in your inboxhere, or simply visitour website).
In a brief moment of senility,Forbesmagazine called me “the new Benjamin Graham.”
I’ve writtentwo bookson investing, which were published by John Wiley & Sons and have been translated into eight languages. (But you can learn the basics of my approach to investing by reading the6 Commandments of Value Investing.
My first non-investing book,Soul in the Game, is available toorder here. You can get 4 entirely new chapters (not found in the book) by forwarding your purchase receipt tobonus@soulinthegame.net.
And if you prefer listening, audio versions of my articles are published weekly atinvestor.fm.
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