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A couple of weeks ago, I sent out an email asking you for any questions you may have - about our investing strategy here at the Melvin Real Income Report, about markets in general, and whatever else may be on your mind.

Well, you asked, so now I’m answering:

Transcript:

Understanding Our Two-Platform Strategy: A Transparent Explanation

The Background: Learning from Past Publishing Experiences

After decades in the financial publishing industry, I've learned some hard lessons about platform dependency and publisher relationships. The traditional publishing model often follows a predictable pattern: We start with quality investment ideas that readers love, deliver good customer service, and achieve strong investment results. However, inevitably, pressure builds to modify the approach. Publishers push for options trading, Bitcoin coverage, or aggressive promotional strategies that promise unrealistic returns like "50% dividends" from covered call strategies or claims about getting rich quickly through options trading.

I've consistently refused to compromise on these matters, which has led to the end of several publishing relationships. While these separations have been professionally manageable, they've often created confusion and disruption for subscribers. The recent situation with Investors Alley (IA) illustrates this perfectly - when I left, there was a weeks-long period where subscribers weren't informed of the change due to contractual obligations, leading to misunderstandings and a perception that I had abandoned them.

The Solution: Platform Independence

This experience led to a fundamental decision: never again would I put myself in a position where one company or publisher could significantly impact my relationship with subscribers or disrupt my business. After careful consideration, I identified two leading independent publishing platforms: Beehiiv and Substack.

Why Use Both Platforms?

The decision to use both platforms simultaneously serves several strategic purposes:

1. Risk Management: By building presence on two platforms, we're ensuring that no single platform holds too much control over our ability to reach subscribers.

2. Platform Evaluation: Each platform has distinct advantages and disadvantages:

   • Different user interfaces and experiences

   • Varying tools for content management

   • Different approaches to community engagement

   • Distinct payment processing systems

   • Unique analytical capabilities

3. Cost Efficiency: Both platforms handle critical infrastructure (credit card processing, email delivery, subscriber management) with minimal overhead, allowing us to offer services at lower prices than traditional publishing arrangements.

4. Future Flexibility: Both platforms offer seamless migration capabilities. When we eventually decide to consolidate onto one platform, we can transfer subscribers without disrupting their service or changing their subscriptions.

Current Implementation

Here's how we're currently utilizing each platform:

1. Substack:

   • Hosts the "Wanderings of a Curious Mind" newsletter

   • Features the paid "Bank and Credit Report" focusing on banks and lenders

   • Provides a platform for detailed financial analysis and commentary

2. Beehiiv:

   • Hosts additional premium services (like the Premium edition of the Melvin Real Income Report you’re currently reading)

   • Offers different content presentation options

   • Enables us to test alternative delivery formats

The Learning Process

This dual-platform approach is admittedly an experiment. I acknowledge it can be inconvenient for subscribers who might need to log into two different sites to access all content. However, I believe this temporary inconvenience is outweighed by several benefits:

1. Quality Control: By maintaining direct control over content and delivery, we ensure consistent quality without external pressure to compromise standards.

2. Cost Benefits: Reduced overhead allows us to charge significantly less for most services compared to traditional publishing arrangements.

3. Direct Communication: Maintaining direct relationships with subscribers ensures transparent communication about any future changes or developments.

Future Plans

While we will eventually consolidate onto a single platform, that decision will be made based on:

• Subscriber feedback and preferences

• Platform performance and reliability

• Tool effectiveness and ease of use

• Cost efficiency and scalability

• Integration capabilities with other services

Commitment to Subscribers

Throughout this experimental phase, my core commitments remain unchanged:

• Maintaining high-quality, thoroughly researched investment advice

• Providing responsive customer service

• Ensuring transparent communication

• Prioritizing subscriber interests over marketing opportunities

• Never compromising on investment principles for promotional purposes

The goal isn't to maximize newsletter sales or personal revenue but to help people make money and improve their financial lives. This approach may seem unconventional in an industry often dominated by marketing-driven decisions, but it aligns with my belief that focusing on subscriber success will naturally lead to sustainable business growth.

While managing content across two platforms requires extra effort (especially as a one-person operation), this structure allows me to maintain independence and control over the quality and integrity of our investment advice. As we continue to evaluate and refine our approach, subscriber feedback will play a crucial role in shaping our future platform strategy.

Mailbag

In this month's mailbag, we're addressing a wide range of investment questions from our valued subscribers. Let's dive into the key topics that are on investors' minds.

Natural Resource Investments: BSM and GRNT

Many readers have asked about the comparison between Blackstone Minerals (BSM) and Granite (GRNT), particularly regarding their natural gas exposure. Both companies operate as royalty trusts, though their recent natural gas production has been affected by low prices. Blackstone Minerals stands out for its exceptional asset management capabilities, with interests across forty-one states and over twenty million acres of oil and gas properties. Their natural gas production currently represents between thirty to forty percent of total production, though this percentage fluctuates with market prices.

One key difference between the two investments lies in their dividend policies. Granite employs a fixed dividend approach supplemented by special dividends and stock buybacks, while Blackstone's distributions vary based on quarterly production and commodity prices. For investors considering Blackstone, it's worth noting that it's a K-1 instrument, though it doesn't generate unrelated business taxable income, making it suitable for IRA holdings.

The Home Street Bank Situation

Following the regulators' rejection of the Home Street merger, many investors are wondering about next steps. The current expectation is that Home Street and First Son will likely return to negotiations to structure a deal more palatable to regulators. Reading between the lines, there may be a strategy to wait for a potential change in administration, which could bring a more favorable regulatory environment.

In the meantime, Home Street has announced plans to sell $800 million worth of loans, likely at a roughly ten percent discount. While this may impact short-term performance, the company maintains its valuable Fannie Mae multifamily direct underwriting and service license – a significant asset given they're the smallest bank with such a license by a factor of ten.

Closed-End Fund Strategy

There's been considerable interest in my closed-end fund approach, particularly given our current limited exposure to the sector. This restraint isn't due to a change in strategy but rather current market conditions. Historically, I've looked for four key criteria: significant discounts to NAV, asset class reversion potential, high current income, and activist involvement. Currently, discounts have narrowed considerably from the double-digit levels I prefer, often sitting in single digits.

I continue to monitor the sector closely, particularly in fixed income and tax-free funds. Market volatility, especially in bonds and international income funds affected by dollar movements, could create attractive opportunities in the future. For now, I am selectively adding closed-end funds like RA and PGZ when they meet our strict criteria.

Infrastructure and Energy Focus

The addition of Mainstay Global Infrastructure Fund (MGIF) to our recommendations has generated numerous questions. While this remains a free pick in our portfolio, it represents our broader bullish stance on infrastructure investments. The fund offers exposure to essential infrastructure assets, though we're waiting for more attractive discount levels before considering it for our premium portfolios.

Looking ahead, we're gradually expanding our coverage of income-producing natural resource stocks, particularly in the energy sector. While we're building out more comprehensive energy coverage, we're taking a measured approach to ensure thorough analysis and research support each recommendation.

A Deep Dive into Closed-End Fund Strategy

Our approach to closed-end funds has generated significant discussion, particularly regarding our current selective stance in the sector. It's important to understand that our limited current exposure isn't a shift in strategy but rather a disciplined response to market conditions. Let me explain our comprehensive approach to closed-end fund investing.

The Four Pillars of Our CEF Strategy

We evaluate closed-end fund opportunities based on four essential criteria:

1. Significant Discounts to Net Asset Value (NAV): Historically, we've targeted funds trading at double-digit discounts, often 15-20% below their NAV. Currently, these opportunities are scarcer, with most funds trading at single-digit discounts. This compression in discounts has made us more selective in our new purchases.

2. Asset Class Reversion Potential: We look for funds holding assets that are temporarily out of favor but show strong potential for mean reversion. This is particularly important in fixed-income and international markets, where cyclical patterns often present opportunities.

3. High Current Income: The fund must provide substantial current income through distributions that are sustainable and primarily derived from earnings rather than return of capital.

4. Activist Involvement: We prefer situations where activist investors are engaged with the fund, potentially catalyzing value through initiatives like tender offers, liquidations, or other corporate actions that can help close the discount to NAV.

Current Market Dynamics

The closed-end fund market has evolved significantly over recent quarters. Saba Capital's activist campaigns have successfully narrowed discounts across many sectors, particularly in tax-free and fixed-income funds. Where we once readily found double-digit discounts, many funds now trade at much tighter spreads to their NAV.

Our current portfolio holdings, including RA and PGZ, were acquired when they met all four criteria. While these positions continue to perform well – some delivering total returns of 30-45% including distributions – we're not seeing many new opportunities that meet our stringent requirements.

Future Opportunities

We anticipate several potential catalysts that could create new opportunities in the closed-end fund space:

1. Market Corrections: A broader stock market decline could lead to wider discounts in equity-focused closed-end funds, though we'd need to carefully evaluate the probability of asset class reversion in such scenarios.

2. Interest Rate Volatility: The recent backup in bond yields has started to pressure fixed-income closed-end funds. If this continues, we might see attractive entry points in high-quality bond funds.

3. Dollar Movements: International income funds often face pressure during periods of dollar strength, potentially creating opportunities in global income strategies.

Portfolio Management Approach

For existing holders of our closed-end fund positions, I maintain active monitoring and will communicate any necessary portfolio adjustments through our Substack platform. I've made my personal email available to subscribers for questions about these holdings, and I'm committed to posting any significant changes or concerns that might warrant position adjustments.

Monitoring Protocol

I continue to track potential opportunities daily, focusing on:

• Discount trends across different fund categories

• Changes in distribution policies and coverage ratios

• Activist filing activity

• Asset class valuations and reversion potential

• Fund manager performance and strategy execution

While I’m not currently offering a standalone closed-end fund service due to limited opportunities meeting our criteria, I remain ready to act when market conditions create more favorable entry points. This could occur when we see a return to widespread double-digit discounts in tax-free funds or during periods of market stress that create temporary dislocations in well-managed funds.

This expanded approach to closed-end fund investing reflects decades of experience in the sector, dating back to the high-yield bond opportunities of the early 1990s and through various market cycles since then. While current conditions may not present abundant opportunities, our disciplined approach ensures we'll be well-positioned to act when market dynamics shift in our favor.

Looking Forward

With significant changes in the political and economic landscape, we're maintaining our disciplined approach to finding value while adapting to new opportunities. The potential for interest rate cuts, ongoing market volatility, and evolving regulatory environment all factor into our investment decisions. As always, our focus remains on generating sustainable income and total returns for our subscribers while maintaining a conservative risk profile.

Remember, successful investing requires patience, thorough research, and a long-term perspective. While market conditions and specific opportunities may change, these fundamental principles continue to guide our investment approach.