If I thought of my portfolio as a football team, how would the whole thing look?
Offense;
quarterback
fullback
halfback
wide receiver
wide receiver
tight end
left tackle
right tackle
left guard
right guard
center
Defense
middle linebacker
right tackle
left tackle
left end
right end
right outside linebacker
left outside linebacker
cornerback
cornerback
left safety
right safety
Who is my quarterback?
The quarterback runs the offense. The quarterback manages the ball (capital). Views the field, calls and executes the play. Deploys the ball; hand-off, pass, keep and run, sneak. The quarterback is the field general.
no better quarterback than the conglomerate CEO; candidates are Warren Buffett, ( CEO of Loewes, Markel, )
running backs; grind out the yards, 3-5 yards per play, over and over. These are growth and income companies; can be relied on to make money in most market conditions; Full back is big and strong, can carry others on his back; large cap, drives through tough times, pounds out a bit of growth and steady dividends year in, year out;
Half-back; a bit smaller, more nimble, with explosive potential; smaller-cap, higher earnings growth, plenty of cash flow, could belt out a big surge in earnings, increase dividends sharply
offensive line; Center; hikes the ball; puts money in motion; this is a low growth, big dividend company; churns out the cash and dividends, market is mature, not much room for growth, but a cash-producing machine.
Guards: Similar to center; large cap, create earnings through production of commodities, food, consumer staples
Tackle; Similar to guard; perhaps a different sector, very steady earnings,
Tight end; this one can run; catch a pass; higher growth potential, dividend at low end of acceptable, but with strong dividend growth potential
Wide receivers; Pure growth/speculative; dividend may be a token, or none. potential for explosive growth.
Defense; These players are those that protect you against a market swoon. They are the contrarian sectors; they are best when the current phase of the market is in decline.
So, who is in the front line against a market melt-down? First, it has to be a company whose product is used in good times and bad. Utilities come to mind. Second, it's performance can't be threatened by a loss of earnings and large debt service. Most utilities have debt, but poeple also keep paying their utilities until times get really tough. Low debt, staple companies sound good to me.
What defensive players might be in the back-field? Linebackers, cornerback and safety; They have to counter the effects of a dramatic downdraft, like intercepting a runner, or a wide-receiver who has broken through to catch a long pass; The first line of defense is sector diversification, as rarely are all sectors performing similarly at once. The next would be investments that run a bit counter to a broad market move down. Hard to know, but perhaps short term bond funds, or international diversification. Finally, a store of value that counters a global meltdown. I would think that would be a contrarian investment, one that rises when everything else is falling. Precious metals might be an example. I'm not particularly interested in owning gold, silver, platinum and the like, so I'll have to think about whether there is something out there that fills this role better.
I'm also not interested in those short-index funds aimed at rising when the market is falling. They're simply an insurance policy that costs money as long as it is in force.
One "store of value" is simply owning equities that pay consistent dividends. Even if valuation drops, payments continue and with reinvestment, share count rises. That compounding occurs irrespective of share price, and if dividends are preserved or grow, it is a contrarian compounding, as lower valuation causes share counts to accumulate even faster. That reduces position value volatilaty (even if not price volatility) REITS make a good means of owning real-estate, because you can incrementally grow your holdings, rather than purchasing them in illiquid hunks.
more on this to eome
Sunday, December 30, 2012
some thoughts on the temptation to speculate
Some thoughts on avoiding the temptation to speculate, or to avoid the risks associated with speculation.
Risk to capital;
The reason for Benjamin Graham's "margin of safety" teaching.
The reason for Warren Buffet's first two rules: "never lose money", and "never forget rule number one"
Risk avoidance drives investors to fixed income investments, which then exposes them to inflation risk, or valuation risk on the fixed income investment, if not held to maturity.
The opposite end of the investing spectrum, growth stocks, places the investor at risk to capital if he chooses a company without talented and disciplined management, without long term growth prospects, with technology at risk for obsolescence.
In the middle are the "safe equities"; large caps, dividend-paying, dividend growing, mid-caps, REITS, MLPs, utilities, etc. These are not speculative investments, as they aren't likely to POP to much larger valuations in short intervals. They carry risk to capital, although not as much, as your dollars purchase a lot of infrastructure, bricks and morter, inventory and their purchase price is not as loaded with expectation of highly inflated future earnings.
This kind of investment is "doomed" to modest appreciation and relatively generous dividend distributions. If one is disciplined and reinvests dividends, the total returns are solid, if unspectacular.
One can only have outsized returns in this market by carefully guarding capital, deploying when valuations are artificially low, recognizing overvaluation and redeploying strategically; in short, paying close attention, having nerves of steel and a willingness to buy and sell based on a series of rules that do not accommodate any sentimental feeling about one's holdings.
However, that kind of torture is, in my opinion, far preferable to the torture of making a bet on a growth stock and seeing it end badly for one reason or another.
One place where one can potentially juice the returns in the staid world of unsexy holdings is in the world of options. Now, options have "risky" written all over them. However, coupled with the disciplined approach to unsexy large cap investing, they appear to offer some added performance at very low risk.
I'm talking specifically about cash-covered puts and covered-calls.
Let's examine the cash covered put; Say, for instance, you intend to purchase another block of the most unsexy large-cap stock you can imagine, as part of your portfolio foundation. The next ex-dividend date is 3 months away and the stock price is a bit above it's moving averages, has a slightly higher than normal P/E, trading at the upper edge of it's recent historic range. Your cash is only at risk if it isn't earning interest, or if it purchases an asset that then depreciates.
Take a stroll through the options premiums; There's a 2 month covered call that, if excercised, will allow you to purchase the stock at 1% cheaper than it's current price. Figuring in transaction fees, you will make 0.9% on your cash to sell that put. If, in two months, you don't receive the stock because the price hasn't dipped, you have 100.9% of your cash 2 months from now. Say, for instance, the stock moved up instead of down and now you are faced with the un-savory prospect of buying it at an even higher price. WAIT...is it overvalued? would you be better off selling another cash-covered put?
Say, for instance, you do this 6 times in a year and still you don't own the stock. It has gone through 4 dividend distributions (3.5% return), and is up 5% from the price when you first committed your cash. You have 5.4% return on your cash and you don't own the stock. Have you lost money? Has your money earned nothing?
Say, for instance, you sold that put, pocketed 0.9% and 2 months later you own the stock, but it's price dipped 1.5%. You're down 0.6%. The ex-dividend date comes and goes, and you're now up 0.8% on the dividend. You own the stock and you're up 0.2% Have you lost money? Did you want to own that stock in the long term? Remember, you also have the put premium, and your purchase price is effectively the strike price minus the put premium. You purchased at 1% down, added 0.9% in put premium, so you purchased at 1.9% down, no a stock that lost 1.5% of it's value at the time you committed; so you're up 0.4% and then comes the dividend (0.8%, in this example) and you're up 1.2% in 3 months, with a lower stock price. Is that bad? Is that worse than having purchased and lost 1.5% when the stock price declined?
Remember; buy low. At any reasonable purchase price, if you can buy at 1-2% lower, you're that much further ahead. If you miss a dividend date, you're missing an opportunity to harvest cash. But if you time the puts correctly, you'll never miss one, as long as you own the stock. If not, you're banking put-premiums.
What about that covered-call;
You own 500 shares of boringconsumerstaplecompany that pays out 5% dividends per year and grows earnings at 3-4% per year. You're happy with your dividend-reinvested total return of 8-9% per year. Since the stock is predictable as the rising of the sun, you can't expect to see large capital gains.
On the other hand, there's a call premium that'll pay you 1% over 2 months, as long as the stock doesn't rise too far too fast. 1%, repeated 3-4 times in a year, improves your total return by 30-50%.
If the stock is called, you bank the appreciation up to the strike price, plus the call premium. You can turn around and purchase that stock right back, bank the next dividend and do it again. You may cap your earnings in any given period, but that doesn't mean you can't get right back in if you desire.
You may forgo a bit of capital appreciation; but you haven't lost ANY of your capital.
I don't think it makes a bit of sense to sell a put on a stock you don't want to own in the long term.
It doesn't make a bit of sense to sell a covered call on a stock that is rapidly rising and raising dividends rapidly. That should reward you adequately for owning that stock. However, some of the more boring and predictable stocks may allow you to sell insurance premiums to other investors and take the "float", knowing that you will only have to pay out in the form of accepting shares or giving them up a fraction of the time, and you can re-enter the market in a moment, once that transaction is complete.
That's a form of trading that really doesn't put your hard earned capital at much risk, knowing you are either acquiring stock at a price you deem to be favorable, or acquiring cash from an investment that is rising in value, perhaps over it's intrinsic value.
If you are managing a stable of stocks, some as holdings, some as prospects, even if your shares are called and you have been handed some cash from a closed call transaction, there should be a candidate stock waiting in the wings to take your money at a lower price-point and put you in position to sell another call. If it's a stock you want, you're in pig heaven. If it's a candidate for a cash-covered put, your money is back in motion, even if you've lost the capital appreciation that your called-stock is experiencing.
Remember that rule;
"never lose money".
If you believe the "never lose money" dictum applies to your long positions, should you hedge your holdings? Should you have trailing stops?
Buying puts is insurance, but it costs you capital. Buying calls is a bet on stock appreciation, but you still pay real dollars for the premium and you don't get it back, even if you win. It might make sense if you have a small stake and want to participate in a large bet, with capped downside of only sacrificing the premium if the story doesn't pan out. That sounds like a gamble to me and I don't like gambling. I like making money, either more or less, but never losing.
With respect to options, that means selling cash-covered puts and covered calls, as neither involves the risk of losing capital, as long as you avoid highly volatile stocks that can fall dramatically.
more on this at a later date...
Risk to capital;
The reason for Benjamin Graham's "margin of safety" teaching.
The reason for Warren Buffet's first two rules: "never lose money", and "never forget rule number one"
Risk avoidance drives investors to fixed income investments, which then exposes them to inflation risk, or valuation risk on the fixed income investment, if not held to maturity.
The opposite end of the investing spectrum, growth stocks, places the investor at risk to capital if he chooses a company without talented and disciplined management, without long term growth prospects, with technology at risk for obsolescence.
In the middle are the "safe equities"; large caps, dividend-paying, dividend growing, mid-caps, REITS, MLPs, utilities, etc. These are not speculative investments, as they aren't likely to POP to much larger valuations in short intervals. They carry risk to capital, although not as much, as your dollars purchase a lot of infrastructure, bricks and morter, inventory and their purchase price is not as loaded with expectation of highly inflated future earnings.
This kind of investment is "doomed" to modest appreciation and relatively generous dividend distributions. If one is disciplined and reinvests dividends, the total returns are solid, if unspectacular.
One can only have outsized returns in this market by carefully guarding capital, deploying when valuations are artificially low, recognizing overvaluation and redeploying strategically; in short, paying close attention, having nerves of steel and a willingness to buy and sell based on a series of rules that do not accommodate any sentimental feeling about one's holdings.
However, that kind of torture is, in my opinion, far preferable to the torture of making a bet on a growth stock and seeing it end badly for one reason or another.
One place where one can potentially juice the returns in the staid world of unsexy holdings is in the world of options. Now, options have "risky" written all over them. However, coupled with the disciplined approach to unsexy large cap investing, they appear to offer some added performance at very low risk.
I'm talking specifically about cash-covered puts and covered-calls.
Let's examine the cash covered put; Say, for instance, you intend to purchase another block of the most unsexy large-cap stock you can imagine, as part of your portfolio foundation. The next ex-dividend date is 3 months away and the stock price is a bit above it's moving averages, has a slightly higher than normal P/E, trading at the upper edge of it's recent historic range. Your cash is only at risk if it isn't earning interest, or if it purchases an asset that then depreciates.
Take a stroll through the options premiums; There's a 2 month covered call that, if excercised, will allow you to purchase the stock at 1% cheaper than it's current price. Figuring in transaction fees, you will make 0.9% on your cash to sell that put. If, in two months, you don't receive the stock because the price hasn't dipped, you have 100.9% of your cash 2 months from now. Say, for instance, the stock moved up instead of down and now you are faced with the un-savory prospect of buying it at an even higher price. WAIT...is it overvalued? would you be better off selling another cash-covered put?
Say, for instance, you do this 6 times in a year and still you don't own the stock. It has gone through 4 dividend distributions (3.5% return), and is up 5% from the price when you first committed your cash. You have 5.4% return on your cash and you don't own the stock. Have you lost money? Has your money earned nothing?
Say, for instance, you sold that put, pocketed 0.9% and 2 months later you own the stock, but it's price dipped 1.5%. You're down 0.6%. The ex-dividend date comes and goes, and you're now up 0.8% on the dividend. You own the stock and you're up 0.2% Have you lost money? Did you want to own that stock in the long term? Remember, you also have the put premium, and your purchase price is effectively the strike price minus the put premium. You purchased at 1% down, added 0.9% in put premium, so you purchased at 1.9% down, no a stock that lost 1.5% of it's value at the time you committed; so you're up 0.4% and then comes the dividend (0.8%, in this example) and you're up 1.2% in 3 months, with a lower stock price. Is that bad? Is that worse than having purchased and lost 1.5% when the stock price declined?
Remember; buy low. At any reasonable purchase price, if you can buy at 1-2% lower, you're that much further ahead. If you miss a dividend date, you're missing an opportunity to harvest cash. But if you time the puts correctly, you'll never miss one, as long as you own the stock. If not, you're banking put-premiums.
What about that covered-call;
You own 500 shares of boringconsumerstaplecompany that pays out 5% dividends per year and grows earnings at 3-4% per year. You're happy with your dividend-reinvested total return of 8-9% per year. Since the stock is predictable as the rising of the sun, you can't expect to see large capital gains.
On the other hand, there's a call premium that'll pay you 1% over 2 months, as long as the stock doesn't rise too far too fast. 1%, repeated 3-4 times in a year, improves your total return by 30-50%.
If the stock is called, you bank the appreciation up to the strike price, plus the call premium. You can turn around and purchase that stock right back, bank the next dividend and do it again. You may cap your earnings in any given period, but that doesn't mean you can't get right back in if you desire.
You may forgo a bit of capital appreciation; but you haven't lost ANY of your capital.
I don't think it makes a bit of sense to sell a put on a stock you don't want to own in the long term.
It doesn't make a bit of sense to sell a covered call on a stock that is rapidly rising and raising dividends rapidly. That should reward you adequately for owning that stock. However, some of the more boring and predictable stocks may allow you to sell insurance premiums to other investors and take the "float", knowing that you will only have to pay out in the form of accepting shares or giving them up a fraction of the time, and you can re-enter the market in a moment, once that transaction is complete.
That's a form of trading that really doesn't put your hard earned capital at much risk, knowing you are either acquiring stock at a price you deem to be favorable, or acquiring cash from an investment that is rising in value, perhaps over it's intrinsic value.
If you are managing a stable of stocks, some as holdings, some as prospects, even if your shares are called and you have been handed some cash from a closed call transaction, there should be a candidate stock waiting in the wings to take your money at a lower price-point and put you in position to sell another call. If it's a stock you want, you're in pig heaven. If it's a candidate for a cash-covered put, your money is back in motion, even if you've lost the capital appreciation that your called-stock is experiencing.
Remember that rule;
"never lose money".
If you believe the "never lose money" dictum applies to your long positions, should you hedge your holdings? Should you have trailing stops?
Buying puts is insurance, but it costs you capital. Buying calls is a bet on stock appreciation, but you still pay real dollars for the premium and you don't get it back, even if you win. It might make sense if you have a small stake and want to participate in a large bet, with capped downside of only sacrificing the premium if the story doesn't pan out. That sounds like a gamble to me and I don't like gambling. I like making money, either more or less, but never losing.
With respect to options, that means selling cash-covered puts and covered calls, as neither involves the risk of losing capital, as long as you avoid highly volatile stocks that can fall dramatically.
more on this at a later date...
Wednesday, November 21, 2012
Looking under the hood;
Am I adequately diversified? Let's look at the details
energy:
Conoco phillips 6076
Linn Energy 27201
Chevron 17064
Enterprise Products Partners 16029
Kinder Morgan Management 15589
Seadrill 14015
Spectra Energy Corp 9434
Teekay LNG Partners 14832
120240
14.69%
utilities
Atlantic Power Corp 10629
Southern Corp 21177
Duke Energy Corp 14008
National Grid 16559
62373
7.62%
telecom
Consolidated Communications Holdings 6271
France Telecom 5095
Otelco 878
China Mobile Ltd 17409
Chunghwa Telecom 11889
CenturyLink 9470
AT&T Inc 14574
Verizon Communications 13933
79514
9.71%
consumer staples
Sysco Corp 24152
Put General Mills 7800
Heinz HJ Corp 14256
Proctor & Gamble 17811
Kimberly Clark14559
78578
9.60%
consumer discretionary
Staples 7166
Costco 17330
Darden Restaurants 16396
McDonalds Corp 14013
Walmart Stores Inc 14499
Put Hasbro 3750
73154
8.94%
basic materials
technology
Nokia 1424
Axion Power International 9149
Cisco Systems, Inc 7594
Intel Corp 12068
Johnson Controls 18341
Microsoft Corp 13951
Exide Technologies Com 9124
71651
8.75%
healthcare
Abbott Laboratories 16420
Johnson and Johnson 15973
Teva Pharmaceutical Industries 14922
47315
5.78%
financials
Aflac Inc
Paychex 9020
Automatic Data Processing 15289
Hudson City Bancorp 14904
US Bancorp 15239
Wells Fargo and Co 15159
69611
8.50%
industrials
General Electric Co 7622
Waste Management 14712
Navios Maritime Partners 13029
25363
3.10%
REITs
Healthcare Trust of America Inc 1198
National Retail Properties Inc 6569
Health Care REIT Inc 15582
Realty Income Corp 16054
Corporate Office Properties 6076
Retail Opportunity Investments Corp 5585
51064
6.24%
Conglomerates
Central Securities Corp 5792
Compass Diversified Holdings 8402
Berkshire Hathaway Inc 17700
31894
3.90%
Mutual Funds
Matthew's Asian Growth and Income Fund 6173
0.75%
Bond Funds
Alliance Bernstein Global High Income Fund, Inc 17886
Western Assets Emerging Markets Debt Fund, Inc 13291
Pimco Strategic Global Goverment Fund, Inc 12483
Templeton Emerging Markets Income Fund, Inc 15241
Blackrock Income Opportunity Trust Inc 12263
71164
8.69%
I seem to be lacking any basic materials...will need to study why I have missed that sector.
My healthcare is essentially all big pharma, except that I have some healthcare REITs
I have a good exposure to global bond funds, but bonds are still only 9% of my overall portfolio.
The conglomerates muddy the waters a bit with respect to sector diversification. I don't have a really good idea of which sectors they represent.
From a standpoint of geographic diversity, my international holdings include the bond funds, the Asia mutual fund, GE, Navios, Big Oil and LNG, Aflac, Big Pharma, Consumer discretionary, Technology, Consumer staples, Telecom and Utilities
In fact, I'm surprised at how well I have international investments covered with the holdings I have.
The pundits would say I should be 50% in bonds, given my age. I just can't bring myself to do that, so my alternative is a high concentration of dividend paying, dividend growing large-cap stocks with relatively low volatility. I think the REITS have similar qualities, since irrespective of property valuations, the lease returns on property pay out similar to a bond. I can convert any of them into income when the time comes, and given my time frame, the underlying capital value is pretty safe.
Compared to the Standard and Poor 500, I'm overweight energy, utilities, telecom, consumer staples, consumer discretionary. I'm underweight basic materials, technology, healthcare, financials and industrials.
Neither the S&P 500 or the NYSE lists REITS as a sector.
I am 6.24% REITS, 8.69% bond and diversified income funds.
If I were to rebalance, I'd increase my health care a bit( Perhaps McKesson, Medtronic, Novo Nordisc) , increase my industrials a bit ( I'm thinking EMR, Cummins, Deere, CAT, maybe Illinois Tool Works, RPM, Dow, ) , find some materials that meet my criteria (perhaps fertilizer, uranium, lithium, silver) of producing dividend income. I like my overweight in energy and utilities, but perhaps I could so a very selective pruning of these to allow diversification into the sectors where I'm really short.
This has been a productive workshop; we'll see how I address this in the new year; should be some profit sharing coming along, so I can rebalance with new cash as opposed to selling a bunch of shares.
Am I adequately diversified? Let's look at the details
energy:
Conoco phillips 6076
Linn Energy 27201
Chevron 17064
Enterprise Products Partners 16029
Kinder Morgan Management 15589
Seadrill 14015
Spectra Energy Corp 9434
Teekay LNG Partners 14832
120240
14.69%
utilities
Atlantic Power Corp 10629
Southern Corp 21177
Duke Energy Corp 14008
National Grid 16559
62373
7.62%
telecom
Consolidated Communications Holdings 6271
France Telecom 5095
Otelco 878
China Mobile Ltd 17409
Chunghwa Telecom 11889
CenturyLink 9470
AT&T Inc 14574
Verizon Communications 13933
79514
9.71%
consumer staples
Sysco Corp 24152
Put General Mills 7800
Heinz HJ Corp 14256
Proctor & Gamble 17811
Kimberly Clark14559
78578
9.60%
consumer discretionary
Staples 7166
Costco 17330
Darden Restaurants 16396
McDonalds Corp 14013
Walmart Stores Inc 14499
Put Hasbro 3750
73154
8.94%
basic materials
technology
Nokia 1424
Axion Power International 9149
Cisco Systems, Inc 7594
Intel Corp 12068
Johnson Controls 18341
Microsoft Corp 13951
Exide Technologies Com 9124
71651
8.75%
healthcare
Abbott Laboratories 16420
Johnson and Johnson 15973
Teva Pharmaceutical Industries 14922
47315
5.78%
financials
Aflac Inc
Paychex 9020
Automatic Data Processing 15289
Hudson City Bancorp 14904
US Bancorp 15239
Wells Fargo and Co 15159
69611
8.50%
industrials
General Electric Co 7622
Waste Management 14712
Navios Maritime Partners 13029
25363
3.10%
REITs
Healthcare Trust of America Inc 1198
National Retail Properties Inc 6569
Health Care REIT Inc 15582
Realty Income Corp 16054
Corporate Office Properties 6076
Retail Opportunity Investments Corp 5585
51064
6.24%
Conglomerates
Central Securities Corp 5792
Compass Diversified Holdings 8402
Berkshire Hathaway Inc 17700
31894
3.90%
Mutual Funds
Matthew's Asian Growth and Income Fund 6173
0.75%
Bond Funds
Alliance Bernstein Global High Income Fund, Inc 17886
Western Assets Emerging Markets Debt Fund, Inc 13291
Pimco Strategic Global Goverment Fund, Inc 12483
Templeton Emerging Markets Income Fund, Inc 15241
Blackrock Income Opportunity Trust Inc 12263
71164
8.69%
I seem to be lacking any basic materials...will need to study why I have missed that sector.
My healthcare is essentially all big pharma, except that I have some healthcare REITs
I have a good exposure to global bond funds, but bonds are still only 9% of my overall portfolio.
The conglomerates muddy the waters a bit with respect to sector diversification. I don't have a really good idea of which sectors they represent.
From a standpoint of geographic diversity, my international holdings include the bond funds, the Asia mutual fund, GE, Navios, Big Oil and LNG, Aflac, Big Pharma, Consumer discretionary, Technology, Consumer staples, Telecom and Utilities
In fact, I'm surprised at how well I have international investments covered with the holdings I have.
The pundits would say I should be 50% in bonds, given my age. I just can't bring myself to do that, so my alternative is a high concentration of dividend paying, dividend growing large-cap stocks with relatively low volatility. I think the REITS have similar qualities, since irrespective of property valuations, the lease returns on property pay out similar to a bond. I can convert any of them into income when the time comes, and given my time frame, the underlying capital value is pretty safe.
Compared to the Standard and Poor 500, I'm overweight energy, utilities, telecom, consumer staples, consumer discretionary. I'm underweight basic materials, technology, healthcare, financials and industrials.
Neither the S&P 500 or the NYSE lists REITS as a sector.
I am 6.24% REITS, 8.69% bond and diversified income funds.
If I were to rebalance, I'd increase my health care a bit( Perhaps McKesson, Medtronic, Novo Nordisc) , increase my industrials a bit ( I'm thinking EMR, Cummins, Deere, CAT, maybe Illinois Tool Works, RPM, Dow, ) , find some materials that meet my criteria (perhaps fertilizer, uranium, lithium, silver) of producing dividend income. I like my overweight in energy and utilities, but perhaps I could so a very selective pruning of these to allow diversification into the sectors where I'm really short.
This has been a productive workshop; we'll see how I address this in the new year; should be some profit sharing coming along, so I can rebalance with new cash as opposed to selling a bunch of shares.
Sunday, November 18, 2012
nuts and bolts
I was recently reminded that I haven't written a cogent business plan for my retirement portfolio. I have a general understanding of what I want the porfolio to do, but no specific goals and benchmarks. I think I'll start writing an outline and then fill in the details;
1) Over-all goals for the portfolio
a) Produce a stream of cash from dividends that is adequate to support me and my family.
b) Produce a stream of cash that grows at or greater than the rate of inflation
c) Produce capital growth that grows at or above the rate of inflation
2) Contribution phase
I am 52 years of age as I type.
a) I will contribute another 4 years at maximal rate, at a minimum
b) I will contribute another 10 years at some rate, as will my wife
3) Accumulation phase
a) I will continue to accumulate assets for another 15 years, until age 67 at least, from internal returns from the portfolio.
b) I will continue to work and support my maintenance in some fashion until age 67 and possibly longer
4) Distribution phase
a) We will live on dividend distributions, rental income and social security, if it still exists, in retirement.
b) The portfolio will continue to grow in value at or above the rate of inflation by capital appreciation, as well as dividend re-investment above and beyond our maintenance needs and minimal distribution requirements.
5) Portfolio design
a) Individual stocks;
business model easily understood.
current dividend >/= 3% ( exceptions for extraordinary company with rapid DGR)
CAGR revenue plus CAGR dividend >/= 10%
member of Dividend Champion, Contender lists (David Fish)
b) sector diversification;
roughly equal distribution into 10 major sectors
energy
utilities
telecom
consumer staples
consumer discretionary
basic materials
technology
healthcare
financials
industrials
OK to overweight sectors according to preference on a year-to-year basis
Individual stocks will be held at roughly equal percentage in the portfolio.
The full allocation for each position will be 2%, with target of 50 holdings
I may choose to purchase half a position or less at a time based on available cash.
c) management of dividends
default position is automatic dividend reinvestment
I will consider a move towards complete or partial targeted reinvestment in order to grow under-valued positions
d) management of new cash inflows
first priority will be given to addition of shares to undervalued holdings
second priority will be given to addition of shares to partial positions
e) rebalancing; on a yearly and ad-hoc basis, rebalance to bring holdings close to the 2% target
f) criteria for selling;
earnings stop growing
failure to raise dividend
dividend cut
company spin off, company will be purchased
this represents a pretty good start....
1) Over-all goals for the portfolio
a) Produce a stream of cash from dividends that is adequate to support me and my family.
b) Produce a stream of cash that grows at or greater than the rate of inflation
c) Produce capital growth that grows at or above the rate of inflation
2) Contribution phase
I am 52 years of age as I type.
a) I will contribute another 4 years at maximal rate, at a minimum
b) I will contribute another 10 years at some rate, as will my wife
3) Accumulation phase
a) I will continue to accumulate assets for another 15 years, until age 67 at least, from internal returns from the portfolio.
b) I will continue to work and support my maintenance in some fashion until age 67 and possibly longer
4) Distribution phase
a) We will live on dividend distributions, rental income and social security, if it still exists, in retirement.
b) The portfolio will continue to grow in value at or above the rate of inflation by capital appreciation, as well as dividend re-investment above and beyond our maintenance needs and minimal distribution requirements.
5) Portfolio design
a) Individual stocks;
business model easily understood.
current dividend >/= 3% ( exceptions for extraordinary company with rapid DGR)
CAGR revenue plus CAGR dividend >/= 10%
member of Dividend Champion, Contender lists (David Fish)
b) sector diversification;
roughly equal distribution into 10 major sectors
energy
utilities
telecom
consumer staples
consumer discretionary
basic materials
technology
healthcare
financials
industrials
OK to overweight sectors according to preference on a year-to-year basis
Individual stocks will be held at roughly equal percentage in the portfolio.
The full allocation for each position will be 2%, with target of 50 holdings
I may choose to purchase half a position or less at a time based on available cash.
c) management of dividends
default position is automatic dividend reinvestment
I will consider a move towards complete or partial targeted reinvestment in order to grow under-valued positions
d) management of new cash inflows
first priority will be given to addition of shares to undervalued holdings
second priority will be given to addition of shares to partial positions
e) rebalancing; on a yearly and ad-hoc basis, rebalance to bring holdings close to the 2% target
f) criteria for selling;
earnings stop growing
failure to raise dividend
dividend cut
company spin off, company will be purchased
this represents a pretty good start....
Saturday, November 10, 2012
Can't you hear the silence? No campaign ads. It turns out you can't buy the White house, or the Senate after all. I hope all those super PAC donors think hard about donating to support the "I got mine" philosophy the next time. Most of us want our government to look out for the little guy. After all, the tycoons don't appear to need any help.
So there's a little post-election correction. Sorry, y'all bet wrong, and bidding up stock prices didn't help much. Now there's the issue of the "fiscal cliff". I'm betting it's going to by like Y2K...remember that? We all thought the world was going to come to an end, and it didn't. Likewise the 'fiscal cliff'. Taxes go up a bit, for folks who can handle it. The government lives with less. It's exactly what we need; we're living beyond our means, collectively. We have to stop spending money we don't have, pay down our debt.
Life goes on. Washington is like the stock market; too much hype and over-reaction to news.
I think the companies I own will continue to sell their products, continue to pay dividends, and i'll continue to invest them. Even if we get a real correction, what should I do? Abandon a strategy to grow yearly income and put the cash under a mattress? Come taxes, come recession, the best strategy I know is to be invested in the best companies on earth, selling things that people can't do without.
The following trends seem inevitable; we need energy, will produce more domestically. I own the pipelines and regulated utilities, as well as big oil and domestic, land-based oil and gas, a fair piece of renewables buried in there.
The population grows, and each member grows. That means food. I own food distribution, food production, groceries and the like.
We need shelter; I own REITS, rental property.
We need health care; I own the property where health care is delivered.
We need technology infrastructure; I own the best of breed amongst them.
We want and need to communicate more; I own a bunch of the telecom infrastructure.
I'm dabbling back into some financial institutions; so far not too successfully. I have a couple of speculative investments in the energy space, also taking a beating. Don't know why I don't learn those lessons...but by percentage, just a bit of my investments. I can afford to wait these out and see if the theses play out as expected.
The passing of another election makes me think about chunks of time and the events that mark the end of one thing and the beginning of another. Early in life there was the onset of school. Then high-school, college, med-school, residency and fellowship. All defined amounts of time, with endpoints and new beginnings. I skipped the academic ladder, with tenure, associate and full professor, etc., o what I had was starting practice and retirement, with some unofficial landmarks in there...becoming medical director, becoming managing partner, but nothing all that solid.
Really, though, the career interval is age 35-67; 32 years, arbitrarily divided into 4 8-year segments, or 8 4-year segments. So, at age 52, I'm through 4 1/2 of those 4 year segments, with 3 1/2 to go.
If I work until age 67 (fat chance!), I have another 15 years to stash away about 50k per year if I can keep working the pace I do now. Actually, I can't imagine doing that. at least 2 of those 4 year segments need to be directed to doing something different than I'm doing now, perhaps 3 of them. That means only 2-6 more years of humping it, before bailing out of my current activities and finding meaning elsewhere. I have plenty of ideas. I wonder if I have adequate courage?
So there's a little post-election correction. Sorry, y'all bet wrong, and bidding up stock prices didn't help much. Now there's the issue of the "fiscal cliff". I'm betting it's going to by like Y2K...remember that? We all thought the world was going to come to an end, and it didn't. Likewise the 'fiscal cliff'. Taxes go up a bit, for folks who can handle it. The government lives with less. It's exactly what we need; we're living beyond our means, collectively. We have to stop spending money we don't have, pay down our debt.
Life goes on. Washington is like the stock market; too much hype and over-reaction to news.
I think the companies I own will continue to sell their products, continue to pay dividends, and i'll continue to invest them. Even if we get a real correction, what should I do? Abandon a strategy to grow yearly income and put the cash under a mattress? Come taxes, come recession, the best strategy I know is to be invested in the best companies on earth, selling things that people can't do without.
The following trends seem inevitable; we need energy, will produce more domestically. I own the pipelines and regulated utilities, as well as big oil and domestic, land-based oil and gas, a fair piece of renewables buried in there.
The population grows, and each member grows. That means food. I own food distribution, food production, groceries and the like.
We need shelter; I own REITS, rental property.
We need health care; I own the property where health care is delivered.
We need technology infrastructure; I own the best of breed amongst them.
We want and need to communicate more; I own a bunch of the telecom infrastructure.
I'm dabbling back into some financial institutions; so far not too successfully. I have a couple of speculative investments in the energy space, also taking a beating. Don't know why I don't learn those lessons...but by percentage, just a bit of my investments. I can afford to wait these out and see if the theses play out as expected.
The passing of another election makes me think about chunks of time and the events that mark the end of one thing and the beginning of another. Early in life there was the onset of school. Then high-school, college, med-school, residency and fellowship. All defined amounts of time, with endpoints and new beginnings. I skipped the academic ladder, with tenure, associate and full professor, etc., o what I had was starting practice and retirement, with some unofficial landmarks in there...becoming medical director, becoming managing partner, but nothing all that solid.
Really, though, the career interval is age 35-67; 32 years, arbitrarily divided into 4 8-year segments, or 8 4-year segments. So, at age 52, I'm through 4 1/2 of those 4 year segments, with 3 1/2 to go.
If I work until age 67 (fat chance!), I have another 15 years to stash away about 50k per year if I can keep working the pace I do now. Actually, I can't imagine doing that. at least 2 of those 4 year segments need to be directed to doing something different than I'm doing now, perhaps 3 of them. That means only 2-6 more years of humping it, before bailing out of my current activities and finding meaning elsewhere. I have plenty of ideas. I wonder if I have adequate courage?
Sunday, October 14, 2012
It's tough to see the forest for the trees...
It's tough to see the forest for the trees...
So, I read a very compelling post by a guy whose tagname is Chumpmenudo. You have to like that name...He writes well, with substance.
He created some scenarios that show that a pure capital gains investing approach yields a larger portfolio value over time, given certain assumptions. He compared 10% capital gains with a combination of lower capital gains and dividend payments that add up to 10%, with dividend reinvestment.
On a one-to-one basis, he showed that higher capital gains outstrip the value of lower capital gains plus dividends. He made the argument that if you're not living off proceeds of your portfolio, total return is the only important metric, and you can always instantly switch to a dividend strategy when you need the income.
The problem here is that identifying a portfolio of guaranteed high growth companies that will perform at that level for decades is exceedingly difficult. Portfolio performance is about averages. You make bets, some of which are borne out and some fall flat. One premise of dividend investment is that dividend history, along with an eye to the business metrics that support dividend payment, is a reliable indicator of companies that will continue to perform predictably over time. Volatility matters in a single stock, as well as a portfolio. You have to remember that famous WB quote; rule number one is "never lose money". Rule number two is "never forget rule number one".
I think it would be considerably difficult to identify a portfolio of 20-50 equities that all reliably produce 10% capital gains over time. It may be similarly difficult to identify a portfolio of equities that on average produces 10% capital gains over time. That's why the entire mutual fund industry developed, after which the ETF industry developed, with both passive and active components. One is always given the choice of lower fee passive instruments that hope to track the market, or an index. The higher fees of actively managed instruments is supposed to yield market beating results, managed by professionals. The problem is, most of them don't.
Dividend growth investing is about building a portfolio one stock at a time. It rejects the "basket mentality" of index investing. It rejects the fees paid whether or not the portfolio performs. It rejects the concept that beating a benchmark is the indication of success. It recognizes that total return matters, as it recommends selling overvalued companies and repositioning into lower valued companies that pay a higher dividend and also have prospects for more rapid capital appreciation.
I haven't encountered a capital-gains only strategy that incorporates low volatility, markers of reliable performance over time, total return "anchoring" dividend payments, the option to build a cash position to help with rebalancing (turn off the drip either globally or selectively). It may be out there, but it'll have to start making itself known by a prominent title that catches my eye, or I won't waste the time looking for it.
My portfolio yields about 4.5% dividends, all of which are reinvested. It needs to add another 5.5% capital gains to make a total of 10% total return as a portfolio yearly. I add another 6% to it every year, maximizing my deferred income every year. I find that to be comfortably achievable, without stretching too far.
What I need to do now is adopt a monitoring strategy that reliably sees the appropriate metrics at regular intervals for the whole portfolio. That means finding a reliable spreadsheet, entering all the positions, and tracking dividend growth, earnings growth, payout ratio, growth in value, position growth, total portfolio performance. I may have found one, and I'll be examining it carefully over the next several weeks.
I'll be watching that Chumpmenudo guy closely and see how he actually behaves, as opposed to how he blogs
So, I read a very compelling post by a guy whose tagname is Chumpmenudo. You have to like that name...He writes well, with substance.
He created some scenarios that show that a pure capital gains investing approach yields a larger portfolio value over time, given certain assumptions. He compared 10% capital gains with a combination of lower capital gains and dividend payments that add up to 10%, with dividend reinvestment.
On a one-to-one basis, he showed that higher capital gains outstrip the value of lower capital gains plus dividends. He made the argument that if you're not living off proceeds of your portfolio, total return is the only important metric, and you can always instantly switch to a dividend strategy when you need the income.
The problem here is that identifying a portfolio of guaranteed high growth companies that will perform at that level for decades is exceedingly difficult. Portfolio performance is about averages. You make bets, some of which are borne out and some fall flat. One premise of dividend investment is that dividend history, along with an eye to the business metrics that support dividend payment, is a reliable indicator of companies that will continue to perform predictably over time. Volatility matters in a single stock, as well as a portfolio. You have to remember that famous WB quote; rule number one is "never lose money". Rule number two is "never forget rule number one".
I think it would be considerably difficult to identify a portfolio of 20-50 equities that all reliably produce 10% capital gains over time. It may be similarly difficult to identify a portfolio of equities that on average produces 10% capital gains over time. That's why the entire mutual fund industry developed, after which the ETF industry developed, with both passive and active components. One is always given the choice of lower fee passive instruments that hope to track the market, or an index. The higher fees of actively managed instruments is supposed to yield market beating results, managed by professionals. The problem is, most of them don't.
Dividend growth investing is about building a portfolio one stock at a time. It rejects the "basket mentality" of index investing. It rejects the fees paid whether or not the portfolio performs. It rejects the concept that beating a benchmark is the indication of success. It recognizes that total return matters, as it recommends selling overvalued companies and repositioning into lower valued companies that pay a higher dividend and also have prospects for more rapid capital appreciation.
I haven't encountered a capital-gains only strategy that incorporates low volatility, markers of reliable performance over time, total return "anchoring" dividend payments, the option to build a cash position to help with rebalancing (turn off the drip either globally or selectively). It may be out there, but it'll have to start making itself known by a prominent title that catches my eye, or I won't waste the time looking for it.
My portfolio yields about 4.5% dividends, all of which are reinvested. It needs to add another 5.5% capital gains to make a total of 10% total return as a portfolio yearly. I add another 6% to it every year, maximizing my deferred income every year. I find that to be comfortably achievable, without stretching too far.
What I need to do now is adopt a monitoring strategy that reliably sees the appropriate metrics at regular intervals for the whole portfolio. That means finding a reliable spreadsheet, entering all the positions, and tracking dividend growth, earnings growth, payout ratio, growth in value, position growth, total portfolio performance. I may have found one, and I'll be examining it carefully over the next several weeks.
I'll be watching that Chumpmenudo guy closely and see how he actually behaves, as opposed to how he blogs
Thursday, October 11, 2012
New insights on DGI:
So much for go away in May, huh.... The pundits are saying we're at a peak and trouble is coming.
Certainly something is coming; election, lame duck session of congress, tax measures expiring, perhaps another collision with the national debt ceiling. The sky has been falling in Europe for literally months now...China's economy slowing to a veritable crawl at 7% per year; the sky must be falling somewhere, after all.
I'm a bit more comfortable with the idea of staying invested, since I'm trying harder to keep my eye on a different ball; not the portfolio value ball, but the rising dividend payment ball. Yields go up and down as the valuations go up and down. Hopefully, company revenues and profits continue to go up, on average, so dividend payments will also go up, and up at a higher rate than inflation. If that happens, my savings and DRIP plan will yield what I am aiming for; enough income in retirement to live off dividends, and not spend down capital positions.
I just read and memorized the single most important quote I have read in years: capital gains don't compound. Remember that compounding interest is the 8th wonder of the world, the single most powerful financial force in the world. How do you inject this force into market investments? You find investments where something is compounding! There's no doubt that capital gains are a powerful engine for wealth accumulation. They generally make up about 2/3 of value appreciation in a position. However, if you add a multiplier that captures increasing amounts of that value appreciation, your overall gain skyrockets. That's the secret sauce in Dividend Growth Investment over time. It's why the tortoise beats the hare. The hare has capital gains as it's only engine. The tortoise may not have legs like rockets, but dividend reinvestment puts more and more legs to work and each one piles on more capital gains force, and a bit more dividend capture force into the investment.
I continue to read about other investments; after all, my emerging market bond funds are still the strongest performers I own over the last 4-5 years. However, they have a similar component of capital appreciation as well as compounding as I re-invest the interest payments(dividends) into larger positions in the funds. More secret sauce...
work beckons...
So much for go away in May, huh.... The pundits are saying we're at a peak and trouble is coming.
Certainly something is coming; election, lame duck session of congress, tax measures expiring, perhaps another collision with the national debt ceiling. The sky has been falling in Europe for literally months now...China's economy slowing to a veritable crawl at 7% per year; the sky must be falling somewhere, after all.
I'm a bit more comfortable with the idea of staying invested, since I'm trying harder to keep my eye on a different ball; not the portfolio value ball, but the rising dividend payment ball. Yields go up and down as the valuations go up and down. Hopefully, company revenues and profits continue to go up, on average, so dividend payments will also go up, and up at a higher rate than inflation. If that happens, my savings and DRIP plan will yield what I am aiming for; enough income in retirement to live off dividends, and not spend down capital positions.
I just read and memorized the single most important quote I have read in years: capital gains don't compound. Remember that compounding interest is the 8th wonder of the world, the single most powerful financial force in the world. How do you inject this force into market investments? You find investments where something is compounding! There's no doubt that capital gains are a powerful engine for wealth accumulation. They generally make up about 2/3 of value appreciation in a position. However, if you add a multiplier that captures increasing amounts of that value appreciation, your overall gain skyrockets. That's the secret sauce in Dividend Growth Investment over time. It's why the tortoise beats the hare. The hare has capital gains as it's only engine. The tortoise may not have legs like rockets, but dividend reinvestment puts more and more legs to work and each one piles on more capital gains force, and a bit more dividend capture force into the investment.
I continue to read about other investments; after all, my emerging market bond funds are still the strongest performers I own over the last 4-5 years. However, they have a similar component of capital appreciation as well as compounding as I re-invest the interest payments(dividends) into larger positions in the funds. More secret sauce...
work beckons...
Sunday, June 3, 2012
What to do with a correction?
well, it's happened again. The market gained a bunch over the last 10 months since the last swoon, then give it all back on a combination of the same news we've been hearing for the last 2 years about economic uncertainty in Europe, slowing of the growth juggernaut in China,softening prices for basic materials, anemic economic recovery in the USA, etc. All this time, the government has kept the cost of borrowing (and also bond earnings) very low, companies have paid off debt, restructured debt, shed non-core products and divisions, and generally improved their earnings, margins, dividend payments. The DG investor is programmed to applaud corrections as an ideal time to add to positions in strong companies with the preferred profile of rising earnings, rising dividends, low pay-out ratio. That is, if you have cash to deploy.
I find myself in the familiar position of being long on positions, short on cash when the correction came. In fact, I spent some cash just before the correction. Silly me, missed the market timing yet again. But then, the DG gurus remind me that no-one is good at timing the market, so incremental investments such as dollar cost averaging, dividend reinvestment plans are considered good things. I'm just not able to keep cash lying around without committing it to something. Since I'm not smart enough or patient enough to only add to positions when prices are down or a given equity is "a better value" than another in my portfolio, I guess I'm doomed to always be short on cash when the big opportunities present themselves.
New cash comes into my qualified plan in small increments monthly and a larger bolus yearly. If I could put the cash to work immediately without purchasing equities, i'd be less likely to spend it...Here's the rub; how can I have the cash working, but still available?
Since a change of 1-2$ in the value of a stock is merely "noise" in an active market, it takes a drop of perhaps 3-5% to be really noticable and a drop of 10% to be called a correction. Seen in cash-covered put terms, if one sells cash covered puts at strike prices between 3-5% under current value, and is able to earn 5-12% per year on the cash, and then keep the assigned positions when they occur, perhaps that's a means to add positions at favorable values, keep cash earning cash, and avoid holding a significant cash position awaiting a "correction".
What about on the "call side"? If the valuations are rising, covered calls always cap the potential gain. That is psychologically difficult; accepting a finite payment now in exchange for losing the chance to experience higher gain in an upward moving market. Perhaps the solution is one of calculating percent gain by options versus holding stocks.
If the call premium itself allows earnings of 5-6% per year and you plan appropriately to avoid losing dividend payments, perhaps the combination of call premium plus dividends, in addition to some capital gains between the purchase price and a strike price that would result in the stocks being called away, would soften the pain of losing out on the full value of an upswing in price.
For many equities, the cash balance of the account has to be in excess of $3000 to sell even one options contract. One would need to be comfortable keeping 3-5% of the portfolio in "working cash" to accrue the value of having ready cash in the case of a correction in one or more desireable issues.
selling options is a very active strategy; takes time and effort to do it, track it, etc. I'm not sure I have both discipline AND enthusiasm for it. I'll be thinking this one over on upcoming holiday time.
high road, low road
There's something counterintuitive going on in my portfolio that deserves a closer look.
My best performing equities tend to be higher-dividend, lower capital-growth rate stocks.
The common wisdom in DG investing says to find companies with steady earnings growth rates, steady dividend growth rates and lower payout ratios. These should perform well over the long run as rising earnings drive both the stock price and dividend payout.
I think what gets lost in that logic is that the growth in your position can be due to capital appreciation, share count growth, dividend growth, or all of the above.
Your high dividend yield company may have modest capital growth, but combine that with a big dividend and reinvestment, your share count ratchets up, your share price grows more leisurely, the dividend rises a bit, along with the modest share price growth. If the dividend is really generous, the share count continues to climb, compounding that big dividend.
Frankly, provided the company's earnings are steady and solid, I'd rather book a larger dividend than hope for sustained growth over time and hope the dividend follows. Companies that aren't growing all that fast can still throw off a lot of cash and, used to re-invest, large dividends lead to rapid accumulation of more stock, compounding the cash return year by year.
If you thrill to see that stock price rise and the value of the position rise with it, choose the faster-growing, lower dividend stock. You aren't quite as motivated by the dividend, perhaps.
If you prefer money in the hand, choose the more modestly growing higher dividend stock, and thrill to the more rapid growth in position as you reinvest those hefty dividends. Look at total growth in the position, or yield on cost, to help figure out the true performance of the individual stock.
that may mean building a spreadsheet...ughh.
My best performing equities tend to be higher-dividend, lower capital-growth rate stocks.
The common wisdom in DG investing says to find companies with steady earnings growth rates, steady dividend growth rates and lower payout ratios. These should perform well over the long run as rising earnings drive both the stock price and dividend payout.
I think what gets lost in that logic is that the growth in your position can be due to capital appreciation, share count growth, dividend growth, or all of the above.
Your high dividend yield company may have modest capital growth, but combine that with a big dividend and reinvestment, your share count ratchets up, your share price grows more leisurely, the dividend rises a bit, along with the modest share price growth. If the dividend is really generous, the share count continues to climb, compounding that big dividend.
Frankly, provided the company's earnings are steady and solid, I'd rather book a larger dividend than hope for sustained growth over time and hope the dividend follows. Companies that aren't growing all that fast can still throw off a lot of cash and, used to re-invest, large dividends lead to rapid accumulation of more stock, compounding the cash return year by year.
If you thrill to see that stock price rise and the value of the position rise with it, choose the faster-growing, lower dividend stock. You aren't quite as motivated by the dividend, perhaps.
If you prefer money in the hand, choose the more modestly growing higher dividend stock, and thrill to the more rapid growth in position as you reinvest those hefty dividends. Look at total growth in the position, or yield on cost, to help figure out the true performance of the individual stock.
that may mean building a spreadsheet...ughh.
Sunday, April 8, 2012
diversification from a bottom up perspective
I have paid the price for a lack of diversification. Back in the days of my ignorance, I listened to the siren song of "experts" and bet a piece of my retirement plan on dominant stocks in the tech industry. I didn't understand valuation, projected future earnings, etc. I took a bath along with all the other 'me too' investors who believed the hype.
Later, having learned that lesson and developed a S&P 500 equivalent equity portfolio, I chose the biggest of the US retail banks for my portfolio. Little did I know that they were all taking on risk, betting on and against one another, leveraging heavily, packaging junk mortgages into securities for which they would become liable, etc. There, the specifics of my failure to understand was to trust an industry of a single country, with it's specific laws and the proclivity of it's highest executives to exercise (or fail to exercise) prudence in strategic planning. I doubt that anyone could have foretold the magnitude of the fiasco that followed, unless they were an industry insider. While American and European financial institutions failed or took government bail-outs, Canadian Banks clocked along just fine, as they didn't participate in the foolishness. As Mr Buffet says; invest in companies with a simple business model, where you know how they make money. GE was taken down by GE capital, not by their jet engines, CT scanners or other technology.
I'm not thrilled with the idea of purchasing equities in foreign countries, with difficult access to foreign stock exchanges, different accounting rules, currency risk and tax on dividends to foreign investors. So, I require my investments to have a listing on the NYSE or NASDAQ, or on the Toronto stock exchange in a pinch. However, there are many companies that do just that and allow diversification into the whole world. Some of the largest American companies on earth actually earn the majority of their profits overseas. They are not hard to spot.
One has to forgo that perverse urge to "beat the market" and instead focus on finding safe, steady earnings growth, low volatility, steady payments to owners (dividends) and focus on finding that in multiple industries in multiple places on earth. The good news is it's all doable. The bad news is that you have to keep paying attention. I took my eye off the ball on a few rural telecoms and lost most of the substantial gains I had accrued when I failed to recognize declining earnings. The market often forgets to reward outsized performance for a while. It never fails to punish declining earnings, especially when they are associated with "missed guidance".
I'm a "bottom up, one stock at a time" portfolio builder. Not that I don't own a few funds... I use funds to cover a region or a sector that I don't yet understand. In general, they haven't thrilled me with their incredible performance, but they offer some peace of mind on the diversification front. If you look closely, you can find some substantial yield in closed-end funds, so you continue to be paid to own a basket of equities.
I look at individual stocks based first on a dividend payment screen. That identifies companies who believe paying owners is important. Then, I look for growing dividends, based on growing earnings. Then I look at the payout ratio and take into account the industry and the type of equity (REITs and MLPs are required to pay out the majority of earnings). Then I think about sector diversity and I ask whether the company earns all it's money in one place, from one customer, etc. I check on current and historic valuation (I purchase that capacity so as to avoid a bunch of number crunching).
Then I make a choice to invest. I'm a buy and hold, and working to be a better buy and monitor investor. I like Mr. Buffet's predisposition to a "forever" holding period. However, I realize that the fortunes of companies change and I need to pay attention. When I check back in on an investment, I need to excercise the discipline to ask the real questions that matter.
Are earnings increasing? At what rate? Are dividends following earnings? Did something about the business fundamentally change? ( Think PCs to smart phones to tablets; in contrast to Coca Cola)
If you don't have the interest in paying attention, then you're an index mutual fund investor.
If you derive some pleasure out of tending your own garden, then portfolio management, bottom up, is a stimulating place to be. I wouldn't call it fun, exactly, as it is your future you're playing with. However, you either pay someone else, and trust someone else to do it for you, or you invest the time and educational requirement and take ownership of your results. What kind of investor are you?
I figured it out the hard way, and I'm reasonably happy with where I have landed.
Later, having learned that lesson and developed a S&P 500 equivalent equity portfolio, I chose the biggest of the US retail banks for my portfolio. Little did I know that they were all taking on risk, betting on and against one another, leveraging heavily, packaging junk mortgages into securities for which they would become liable, etc. There, the specifics of my failure to understand was to trust an industry of a single country, with it's specific laws and the proclivity of it's highest executives to exercise (or fail to exercise) prudence in strategic planning. I doubt that anyone could have foretold the magnitude of the fiasco that followed, unless they were an industry insider. While American and European financial institutions failed or took government bail-outs, Canadian Banks clocked along just fine, as they didn't participate in the foolishness. As Mr Buffet says; invest in companies with a simple business model, where you know how they make money. GE was taken down by GE capital, not by their jet engines, CT scanners or other technology.
I'm not thrilled with the idea of purchasing equities in foreign countries, with difficult access to foreign stock exchanges, different accounting rules, currency risk and tax on dividends to foreign investors. So, I require my investments to have a listing on the NYSE or NASDAQ, or on the Toronto stock exchange in a pinch. However, there are many companies that do just that and allow diversification into the whole world. Some of the largest American companies on earth actually earn the majority of their profits overseas. They are not hard to spot.
One has to forgo that perverse urge to "beat the market" and instead focus on finding safe, steady earnings growth, low volatility, steady payments to owners (dividends) and focus on finding that in multiple industries in multiple places on earth. The good news is it's all doable. The bad news is that you have to keep paying attention. I took my eye off the ball on a few rural telecoms and lost most of the substantial gains I had accrued when I failed to recognize declining earnings. The market often forgets to reward outsized performance for a while. It never fails to punish declining earnings, especially when they are associated with "missed guidance".
I'm a "bottom up, one stock at a time" portfolio builder. Not that I don't own a few funds... I use funds to cover a region or a sector that I don't yet understand. In general, they haven't thrilled me with their incredible performance, but they offer some peace of mind on the diversification front. If you look closely, you can find some substantial yield in closed-end funds, so you continue to be paid to own a basket of equities.
I look at individual stocks based first on a dividend payment screen. That identifies companies who believe paying owners is important. Then, I look for growing dividends, based on growing earnings. Then I look at the payout ratio and take into account the industry and the type of equity (REITs and MLPs are required to pay out the majority of earnings). Then I think about sector diversity and I ask whether the company earns all it's money in one place, from one customer, etc. I check on current and historic valuation (I purchase that capacity so as to avoid a bunch of number crunching).
Then I make a choice to invest. I'm a buy and hold, and working to be a better buy and monitor investor. I like Mr. Buffet's predisposition to a "forever" holding period. However, I realize that the fortunes of companies change and I need to pay attention. When I check back in on an investment, I need to excercise the discipline to ask the real questions that matter.
Are earnings increasing? At what rate? Are dividends following earnings? Did something about the business fundamentally change? ( Think PCs to smart phones to tablets; in contrast to Coca Cola)
If you don't have the interest in paying attention, then you're an index mutual fund investor.
If you derive some pleasure out of tending your own garden, then portfolio management, bottom up, is a stimulating place to be. I wouldn't call it fun, exactly, as it is your future you're playing with. However, you either pay someone else, and trust someone else to do it for you, or you invest the time and educational requirement and take ownership of your results. What kind of investor are you?
I figured it out the hard way, and I'm reasonably happy with where I have landed.
Saturday, April 7, 2012
long hiatus
life goes on.
retirement investment goes on.
the market goes up and down, thankfully more up than down since my last post several months ago. However, the big July 2011 swoon had to be absorbed, and the updraft didn't really occur until first quarter 2012. What saved me from the panic of watching prices drop was dividends. They keep rolling in. Companies with good business models keep making money. Those with friendly shareholder policies keep paying dividends. That cushions the down-drafts. My only real investment errors has been to buy ideas that I like, like geothermal, or solar stocks, when I don't understand the underlying market forces that drive their values up and down. I have learned this the hard way more than once. I have to excercise more discipline in segregating my interests from my investing strategy.
I was seriously pre-occupied with stabilizing a real-estate investment debacle over the last several months. It cost me lots of sleep and a large cash investment to turn what was intended to be a short term investment into a long term hold, but fortunately that is now past and I can stop shoveling money down a high-interest debt hole. That was another life lesson in clearly understanding the risks of an investment before entering into it.
I have been able to ride the downs and ups of the market without a personal panic attack. That's a sign of maturing stature in managing my assets. As noted above, the dividend growth strategy has been a big factor in allowing me some comfort, even some sense of opportunity, when the market drops. I need to be more selective about when and where I deploy new cash, as last time around I invested a bunch just BEFORE a market decline rather than just after, inadvertently violating the buy-low rule.
I have also experienced another heady updraft in the last few months. Paradoxically, the updraft makes those dividend growth companies more expensive and purchasing more dividends becomes more pricey. Most people are happy when their stock prices go up. Dividend growth investors like bargains, so there's a conflict. I've been dealing with this dilemma and reading the thoughts of others, and my strategy is slowly taking form. There's a way to "juice" the dividend on stocks that have risen to "overvalued" It's called the covered-call option. You have to be willing to have the stock called away, but if you're happy with the combination of the gain that you lock in, as well as the call premium, you have a nice short-term dividend enhancement strategy, particularly if you're prudent with selling calls that are not too close to current stock price. The call premium generates cash, so there are still brokerage fees to consider when you deploy that cash, but as long as your gain is greater than the cost of getting in and out of a position, you can accrue a net benefit of the strategy in most cases. When that stock DOES get called away, you have to remember that it happened because the stock rose in price, and you got both capital gains AND an option premium. You can't cry over the excess gain that you might have missed.
Another way to manage the conflict between wanting income in your portfolio and the need to purchase stocks at inflated values in an up-market is to use your cash to sell a cash-covered put on the stock you'd like to have more of. If the price drops, you'll pick up those shares at the lower price, with the added value of the call premium in your cash balance. If the price drops well below your put position, you may have purchased and the put premium doesn't make up the difference, so you have purchased into a declining position. So what?...had you purchased the stock outright, you'd be down even further. If you want to hold that position anyway, you'll tolerate some volatility. AND, you're purchasing that stock at least partly for it's dividend generating capacity right? If it's a company that meets the dividend growth criteria, it's a company that steadily grows dividends, has steadily increasing earnings, and in the long run the stock price will follow earnings and dividends. In the long run you don't lose, so the options strategy simply helps you into the shares at a discount to the price where you deploy your cash. If you prefer, you can simply watch the ticker and set your entry point for the stock, but your cash will be idle and you have to be comfortable with limit orders that stay open indefinitely.
One of the values of a disciplined stock picking strategy is that you get to know the history of a given company and it's stock over time. If you have a working knowledge of it's business, it's earnings history, it's dividend payment history and the projections for growth, then you have a reasonable sense of what will happen with stock price and dividends going forward. This allows you to deploy the covered-call strategy (no cash balance required) when the stock has risen beyond what is supported by earnings in the short term (overvalued), and deploy the cash-covered put strategy when you have new money to invest and your stock is in a "range bound" condition where prices vascillate up and down. If you have cash and the price has already tanked, you may as well buy if you really want to grow a company's position.
It occurs to me that the sophisticated dividend growth investor will study a company very carefully, as a hunter studies the prey and the terrain, decide when and where to deploy cash to capture shares, and continually work to drive the average purchase price as low as reasonably possible, while building the position to drive that stream of dividends.
I haven't reached that level of sophistication. I'm still scanning for new, better dividend opportunities, but I find that I have to look harder, and more carefully, in places I'm less comfortable dwelling, as my portfolio grows. It makes sense to begin paying more attention to the companies I own and developing more sophisticated strategies to grow the positions. After all, sometimes things occur in those companies that lead to investment losses. If I'm not paying close attention, all my efforts could be lost due to a missed trend that leads to a shrinking position. That has happened to me already on more than one occasion.
In short;
I'm learning to look at valuation before I make a purchase.
I'm learning to look at earnings history, dividend history and payout ratio as a means to decide on the merits of an investment
I'm learning to consider when and how to add to a position, either by DRIP or by new purchases
I'm learning how to deploy cash in ways other than simply buying when cash is in the account.
so, I am learning...by and large, I'm also accumulating some modest assets, with some mistakes along the way.
sounds like how life often goes...
retirement investment goes on.
the market goes up and down, thankfully more up than down since my last post several months ago. However, the big July 2011 swoon had to be absorbed, and the updraft didn't really occur until first quarter 2012. What saved me from the panic of watching prices drop was dividends. They keep rolling in. Companies with good business models keep making money. Those with friendly shareholder policies keep paying dividends. That cushions the down-drafts. My only real investment errors has been to buy ideas that I like, like geothermal, or solar stocks, when I don't understand the underlying market forces that drive their values up and down. I have learned this the hard way more than once. I have to excercise more discipline in segregating my interests from my investing strategy.
I was seriously pre-occupied with stabilizing a real-estate investment debacle over the last several months. It cost me lots of sleep and a large cash investment to turn what was intended to be a short term investment into a long term hold, but fortunately that is now past and I can stop shoveling money down a high-interest debt hole. That was another life lesson in clearly understanding the risks of an investment before entering into it.
I have been able to ride the downs and ups of the market without a personal panic attack. That's a sign of maturing stature in managing my assets. As noted above, the dividend growth strategy has been a big factor in allowing me some comfort, even some sense of opportunity, when the market drops. I need to be more selective about when and where I deploy new cash, as last time around I invested a bunch just BEFORE a market decline rather than just after, inadvertently violating the buy-low rule.
I have also experienced another heady updraft in the last few months. Paradoxically, the updraft makes those dividend growth companies more expensive and purchasing more dividends becomes more pricey. Most people are happy when their stock prices go up. Dividend growth investors like bargains, so there's a conflict. I've been dealing with this dilemma and reading the thoughts of others, and my strategy is slowly taking form. There's a way to "juice" the dividend on stocks that have risen to "overvalued" It's called the covered-call option. You have to be willing to have the stock called away, but if you're happy with the combination of the gain that you lock in, as well as the call premium, you have a nice short-term dividend enhancement strategy, particularly if you're prudent with selling calls that are not too close to current stock price. The call premium generates cash, so there are still brokerage fees to consider when you deploy that cash, but as long as your gain is greater than the cost of getting in and out of a position, you can accrue a net benefit of the strategy in most cases. When that stock DOES get called away, you have to remember that it happened because the stock rose in price, and you got both capital gains AND an option premium. You can't cry over the excess gain that you might have missed.
Another way to manage the conflict between wanting income in your portfolio and the need to purchase stocks at inflated values in an up-market is to use your cash to sell a cash-covered put on the stock you'd like to have more of. If the price drops, you'll pick up those shares at the lower price, with the added value of the call premium in your cash balance. If the price drops well below your put position, you may have purchased and the put premium doesn't make up the difference, so you have purchased into a declining position. So what?...had you purchased the stock outright, you'd be down even further. If you want to hold that position anyway, you'll tolerate some volatility. AND, you're purchasing that stock at least partly for it's dividend generating capacity right? If it's a company that meets the dividend growth criteria, it's a company that steadily grows dividends, has steadily increasing earnings, and in the long run the stock price will follow earnings and dividends. In the long run you don't lose, so the options strategy simply helps you into the shares at a discount to the price where you deploy your cash. If you prefer, you can simply watch the ticker and set your entry point for the stock, but your cash will be idle and you have to be comfortable with limit orders that stay open indefinitely.
One of the values of a disciplined stock picking strategy is that you get to know the history of a given company and it's stock over time. If you have a working knowledge of it's business, it's earnings history, it's dividend payment history and the projections for growth, then you have a reasonable sense of what will happen with stock price and dividends going forward. This allows you to deploy the covered-call strategy (no cash balance required) when the stock has risen beyond what is supported by earnings in the short term (overvalued), and deploy the cash-covered put strategy when you have new money to invest and your stock is in a "range bound" condition where prices vascillate up and down. If you have cash and the price has already tanked, you may as well buy if you really want to grow a company's position.
It occurs to me that the sophisticated dividend growth investor will study a company very carefully, as a hunter studies the prey and the terrain, decide when and where to deploy cash to capture shares, and continually work to drive the average purchase price as low as reasonably possible, while building the position to drive that stream of dividends.
I haven't reached that level of sophistication. I'm still scanning for new, better dividend opportunities, but I find that I have to look harder, and more carefully, in places I'm less comfortable dwelling, as my portfolio grows. It makes sense to begin paying more attention to the companies I own and developing more sophisticated strategies to grow the positions. After all, sometimes things occur in those companies that lead to investment losses. If I'm not paying close attention, all my efforts could be lost due to a missed trend that leads to a shrinking position. That has happened to me already on more than one occasion.
In short;
I'm learning to look at valuation before I make a purchase.
I'm learning to look at earnings history, dividend history and payout ratio as a means to decide on the merits of an investment
I'm learning to consider when and how to add to a position, either by DRIP or by new purchases
I'm learning how to deploy cash in ways other than simply buying when cash is in the account.
so, I am learning...by and large, I'm also accumulating some modest assets, with some mistakes along the way.
sounds like how life often goes...
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