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.
Sunday, April 8, 2012
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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