Sock and Underwear Drawers

I think from time to time we confuse some newer readers/investors with our talk about various items–like “sock drawers”.

If I remember right Gridbird was one of the original users of the term ‘sock drawer’, which is where he ‘stashed’ his shares of various ‘illiquid’ (shares that very rarely trade) shares that were in his opinion safe and worthy of being put away and not ‘babysat’- for instance from obscure utilities etc.

From his use of the term many of us that have hung around message boards for years pretty much know that if someone says it is a “sock drawer” issue we know what that means. But not everyone knows the meaning of some of the terms that get tossed around–some folks see that term and wonder what the hell is the talk of socks. This is why I’m writing this little blurb on the various drawers.

I personally like to think of a lot of my holdings as those in my “underwear drawer“. These are issues that I hold for very long periods of time, but are not of the high quality of those in the “sock drawer”. For instance I own virtually all of the various Gladstone term preferred issues (Gladstone Land, Gladstone Capital and Gladstone Investment) and I have held their various issues for years. I consider these underwear issues because they are not the highest quality issues, but in a stable economy they perform well and I don’t have to ‘babysit’ them–just collect the monthly dividends.

In my ‘sock drawer‘ I have some Gabelli CEF preferreds such as Gabelli Utility Fund preferreds (GUT-A and C), AllianzGI CEF preferreds NCV-A and NVZ-A), Bancroft (BCV-A) and Ellsworth CEF preferred (ECF-A) , Kayne Anderson term preferred (KYN-F), Tricontinental preferred (TY-P) and others–super high quality, but not the higher coupons.

All issues in my sock and underwear drawers are pretty much ‘permanent’ base holdings and comprise 60-80% of our stock and bond investments. The balance of issues we hold are ‘here today and gone tomorrow’–if the price is right.

A blend of the sock drawer and underwear drawer hopefully provides with a 5.5-6.5% return on those fairly safe investments. Then it is hoped the balance of the accounts can provide a 7-8% return–so a blended return near my goal of 7% (while sleeping well at night).

We encourage readers to chime in on this topic (socks and underwear–I don’t mean boxers or briefs) to help the newer folks figure out our terms.

37 thoughts on “Sock and Underwear Drawers”

  1. I have always used the term “under the mattress” and sock drawer. I heard this term when I was a youngster. The old folks used to say this when they wanted to hide money. Personally I have held the Gains and Glads for more than five years.

  2. Tim, the post and responses brought me a smile. whoever coined the phrase, I’ve been in. however, I haven’t heard of the underwear draw before. Now I have.. lol.. only thing is I might have to separate my socks from my underwear now as I have them combined. Different sections but in same draw (in real life)
    my sock draw holds many of the same as you plus like other members I have CNLPL, AILLL, CNTHO, IPLWK,. Recently added, DUK-A, (so glad I did), MTB-C and MTB-P, BAC-B and K..

    Many Happy Returns

  3. Many thanks to all who contribute these insightful comments, Could you help newbies like me by providing company or fund name in mentioning a symbol?

    Thanks.

    1. Ben, If you type in ticker symbol into quantumonline.com it will give you a synopsis of preferred plus the name of company and or “parent”. A good starting point in researching preferreds.

  4. Thanks to Tim for starting this discussion – much appreciated. Most of my stuff is in the “underwear” drawer too, as I would sell if prices would get out of hand. As an early retiree, I have no regular pension so I have to live off the dividends/interest from my preferreds. Actually, I would have been very pleased if long-term interest rates would have gone higher.

    UZA is a long-term holding of mine and probably (if my memory is correct) purchased the shares the first week they were issued. Just a simple 6.95% senior note issued by US Cellular. Like the company and the own about 4,000 cell phone towers. Always review the quarterly SEC filing, but have overall been pleased with the investment return.

    1. I also own UZA. UZB, and UZC are also great options. I do not consider it a sock drawer issue. I do consider it a long term holding. The difference for me is that if the market offers me, 6.95% over par, I will sell it. I would then keep an eye on it, to buy it back around Par. Same for KMPA, a years dividend up front means its available to the market. For my sock drawer issues, they are really not something I look to sell. Said differently, I would want far far more to empty the sock drawer.. I do think the odds are very low to get this kind of capital gain on these called issues, so maybe I am splitting hairs of difference between a sock drawer issue and long term holding.

      1. SteveA – Have you ever looked at GJH, the synthetic based on US Cellular 6.70% senior note due 12/15/33? It’s 6.375% coupon 12/15/33, $10 par and last trade 9.60. That’s about a 6.90% YTM but approx 6.64% current I believe. Seems cheaper than the longer bonds on a yield curve basis. I used to own it a long time ago but haven’t looked as USM in a long time.

          1. SteveA – Maybe a “structured product” would have been a better choice of words than a “synthetic,” but a quick description would be GJH is a security created by a third party (in this case Wachovia Securities) as a way to bring the $1000 par bond market to the masses by artificially creating another security, normally a $25 par bond but in this case a $10 par bond based on an issuer’s original $1000 par bond. Wachovia called their products, STRATS, “Structured Repackaged Asset Backed Trust Securities,” What they did was purchase $12 million of US Cellular 6.70% senior notes due 12/15/33, put them in trust and issued these 6.375% notes with the same maturity with guess who capturing the spread between 6.70% and 6.375%. As a credit, they are essentially identical to the original and are rated solely on the basis of the underlying credit and are rated identically to them, not on the basis of the repackager. For all practical purposes they also have the same call risks as the original underlying bond, and in this case, the 6.70% is non-callable with the exception of the draconian make whole provision. Now I know Grid can provide an example of one of these structured product type repackagings having gone awry for investors when a way was found to unexpectedly call an underlying bond that left the owners of the product high and dry, but in general, that risk is minor. However, I think if USM 6.70% 12/15/33 got called under a make whole provision, the GJH holder would not benefit from the premium call price. I’m going strictly by memory on that and it’s been 10 years since I owned this. The only one of these structured product type repackagings I now own is GJO which is based on Wal-Mart’s flat out non-callable under any circumstances 7.55% due 2/15/30. GJO $25 par is a floating rate monthly pay STRATS based on 3 month LIBOR + 50 basis. Using 3.08% for GJO coupon and 23.03 as last price for GJO, it is trading at 3.98% YTM while the underlying 7.55% 7/15/2030 bond’s offered side yield is 3.06%, so it looks relatively attractive for a Aa2/AA bond, though it is kind of tough to stomach a 3.06% yield for an 11 year 1k bond. Incidentally, GJH’s YTM = 6.90% approx while its underlying 6.70% last offered side YTM = 6.00%.

        1. I recently purchased GJH with a GTC order sitting out there at 9.30. Didn’t think it would actually hit, but some days are thin volume, and an order of about 1,000-2,000 to sell hit the market, and dropped it down to 9.30. I think it’s a decent yield for a reasonably rated issuer for my “standard initial position size” of about $3,000, with a decent maturity that isn’t 80 years. 🙂

  5. I think my “sock drawer” concept has a slight twist to it. I want issues that also float. I am willing to take lower interest rates, if interest rates drop but if interest rates spike, I want my holdings to eventually adjust. Since I have no holdings that are not credit bureau rated, I also want Investment grade rated issues or one notch below. So my sock drawer meeting is Ni-B, AQNA, EBGEF, ERRAF, and FTRSF. I particularly like the Canadian reset issues (the last 3 in the drawer) since they are significantly under par. They may never increase much but if they decrease and the business stays solid, I will add to these holdings. This is my final test to get into the sock drawer, if they pull back, will I buy more.

    1. Steve, I didnt mention it, but I am under assumption I will not be selling my FTRSF either.

      1. First, thanks so much for all the information that can be found here. I also appreciate that one must do their own deep due diligence (DDD). I’ve managed to add SLMNP to my portfolio (WFC-L, BAC-L, OCCIP). I have limit orders in for the 2 Enbridge preferreds waiting to be filled at my target price. One issue i’m struggling with is finding information on FTRSF. I’ve tried/failed finding info on Quautum. After reviewing details on Fortis website, am I correct in assuming that all payments are made in C$, and thus this adds currency risk on top of the normal default/interest rate/call risks?

        Goal is to build a preferred portfolio (10-14 holdings, 20% of total portfolio) with QDI of 6%.

        1. mrinprophet, yes you are correct. Keep in mind also potential tax issues from 15% witholding that will need to be reclaimed come tax season if purchased in taxable account. Call risks are not a concern as they can only be redeemed at their next reset date only which would be 2023. Of course being under par is not pricing that as a concern. Also be mindful of its relative low kicker of about 2.13% if memory serves.
          You want find any info through Quantum on foreign issued preferreds. Any time you see a 5 letter ticker ending in F it usually means a foreign issuance.

            1. Mrinprophet, Im sure you figured it out, but its “you wont find” in Quantum, not you “want find”. I dont know what possesses me to do that, nor my inability to proofread despite knowing I need to….Fortis is as solid as it comes for utility financials, but I am sure you have found relevant info about them. Though it does trade OTC, there was never an intent from issuer and underwriter for this to occur…But the divis show just like any other. Received another round of my ERRAF dividends just this week.

              1. The brain does that to us all… it reads what we meant and not what is there.

                Appreciate the note on the Canadian taxes. My accountant says that it shouldn’t be a problem, so I was hoping to acquire a couple issues to make it worth the time, so to speak. I still have 10 years until retirement (hopefully) so the taxes aren’t a big deal today as I’m just reinvesting the cash flow.

                I’ve held WFC-L, BAC-L for a couple years, but never really expanded my preferred holdings until recently. I lurked here for a while before deciding that it was time to do it. My experience is on the institutional side of investing, and that has colored my views. Feels like the only place to add value with individual securities is where the institutional players are not.

  6. Thanks for starting this discussion, Tim. Interesting to read how each individual views/manages their sock drawer or lockbox holdings. I have to say your ‘underwear drawer’ terminology gave me a chuckle, but I see the difference and the need for that type holding.

    Mike

  7. Tim, I cant remember, but Im pretty sure I stole that term from Camroc who posts here, also. Most of any of my intelligent thoughts originated from somewhere outside my brain, lol.
    The word can mean different things to different people. Of course one thing some “sock drawer” issues still can fall prey to is duration risk. In other words the perpetual could drop a lot from interest rate rises, but the actual dividend payment would remain totally safe.
    Some of my socks may be interchangable and not permanent. They have same credit metrics but price changes caused them to flip flop in and out of the drawer.
    In fact, I would suggest possibly your sock drawer issues are safer than mine for one reason….individual company risk is removed from the equation. A TY-P will never have individual company risk versus any utility preferred. No matter what the credit rating is.

    1. Thanks for the input Grid–we have had some readers wanting further discussion etc on this topic.

  8. I’ve been using ‘lockbox’ for a while now. Less chance for misunderstanding, I think. The major tenants of my lockbox are AILLL, CNTHP, EPD, MMP, MTB-C, CBKLP, and SBNCM. For the most part, I don’t trade or flip things in my lockbox, only add to what I have there–and hope the callables are never called.

    JMO

    1. Camroc, wasnt if you that originated sock drawer term on SI years ago, when we were trying to calm the masses down on chasing every Mreit or shipper coming to market?
      Anyhow, I usually keep 20-25 preferreds as I do now. Using your term of “lockbox”, mine going forward would be ….The various Enbridge resets I own (may sell some shares eventually only because presently am too overloaded to hold indefinitely)…CKNQP, ERRAF, some amount of the IPL preferreds (may prune for more proper allocation at some time though), CDUTF, MSEXP, FIISO, and PFX (not a safe issue but its either bankruptcy or 2032 maturity for me on this).
      Definitely own some as safe or safer than the above, but these could be flipped and or repurchased at times such as PPX or SOCGP but they are not in lock box mode for me.

    2. Thanks camroc–sorry if I gave Grid the ‘sock drawer’ credit–regardless I hope to have a little discussion for some newer investors.

      1. Tim, he is getting up there in age, and may not have remembered for sure anyways, lol….

        1. In the spirit of the discussion, I will also refer to the sock drawer as a “lockbox”.

          My lockbox residents include AILLL, CNTHP, CNLPL, FIISO, CBKLP, KYN-F, MTB-C, BAC-L and WFC-L. A recently deceased resident was HE-U, who departed our community just a few short weeks ago. We hope no others go down that lonely road to oblivion, at least not for a long time.

          1. Inspbudget, you bring up a good secondary point…”Safe, Sock Drawer” issues can still be exposed to capital loss from “call risk”….As you know, I was the “founding father” of the little illiquid ute club of CNLPL, CNTHP, AILLL, plus our HE-U, etc. But I played the flipping game too often and couldnt find a re-entry point that fit my price point. I for the longest time played the above par, past call game pretty good and never got knicked. Its just too hard for me to get back in them at this price level.
            The Canadian reset ute preferreds and Enbridge kind of took their place recently as a suitable substitute for my needs. I also like the blend of resets off 5 yr Tbill in conjunction with fixed perpetuals.

            1. I raided my Lockbox today and sold a portion of my CNTHP position at $56.28.

              Hope to buy back a little lower, and I have about 2 months in which to do it. So a reasonable bet that it will go below $56 before the next ex-div date.

              1. Inspudget, I completed a round trip trade only you could appreciate today. Sold 500 shares of SOCGP last week and repurchased them all about 50 cents cheaper today, lol at $28.23 I think. I guess it hit while I was on the golf course.

    3. Camroc
      Are the initial coupons for Southern Bancshares $10 per each preferred issue?
      Quantum does not even list these symbols, and that data is not available on
      my broker’s site.
      Thanks

        1. I find this confusing, because Schwab lists SBNCM and SBNCN as 7.5% preferreds, implying a $12 par value.

          1. David, because they dont know and are wrong. Vanguard did this too. Trust original source material from the company as listed above. The link I gave provides all the info from the issues that went to market in the 1980s.I made 30% flip on about 1000 shares last year, but they really dont trade much. They are noncallable though. Bank has bought some up through the years. I tracked the share count and a strange market maker exchange on buy floors. I tracked it down as a regional bank specialist broker….Not used by the common man.

        2. Since I have plenty of free time, I found that the B & C preferred issues have a liquidation value of $10 ea. ( I did a search of the SEC report you linked me to and found the coupon rates in less than 20 seconds ). More than one way to skin a skeleton. No heavy reading for me. ( Cntr F + 10 ). But, good try, Gridbird. Appreciate your help.
          Howard

          1. Howard, learn to enjoy the process and get the hands dirty…..Read the history and genesis of issuance, understand the share count outstanding then versus now….Dont cheat the process! 🙂

      1. Howard, here is a link to the latest annual report for Southern Bancshares.

        https://www.southernbank.com/about/southern-bancshares/financial-reports/complete-financial-statement-2018.pdf

        If you search on ‘preferred’ in the link, you’ll quickly find what info is available, including related parties, insider ownership, how they’re trying to reduce the pfd shares outstanding, etc.

        It’s a hard one to find. The last sale was a while ago for only 48 shares. The current ask is at a 5% yield if bought today.

        Definitely not for everybody, but I’m at a point where I don’t try for CG or reach much at all for yield because I no longer have a need to try to maximize everything I do. Just give me that steady sustainable income. It’s a Gridbird special, thank you very much, and firmly in my lockbox.

        JMO

        1. Thank you, Camroc. I appreciate your guidance. For others that are interested, The B & C preferred issues have a liquidation value of $10 each. **As you note, very thinly traded, and currently trading over $12 per share.

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