Is it good times or bad? Are we in recovery or on the brink of the next world-wide financial crisis? Certainly there are crises of all manner at our fingertips in the news.
Here we are in earnings season again. The market is choppy; up 1%, down 2%, up another 1%, down 1.5%. Companies reporting record earnings, missing estimates. Which is it...good or bad? Dividend increases, soft guidance. Perhaps a pattern is emerging; Record earnings, soft guidance leads to a "earnings beat" and higher valuation the next quarter. Valuations remain high, and I'm starting to see some pundits talk like there's a "new normal". You know what happened the last time people were talking that way. The problem is, if there weren't traders, there wouldn't be a market. Can you imagine a day in the stock market where everyone just stayed home, because they didn't like the prices? Still, I'm DRIPing my way to fully invested, allowing my cost basis to ratchet up bit by bit, Am I foolish? I hate cash sitting there, not working. I also think that a few fractional shares, purchased at higher valuation, will be balanced sooner or later by some shares purchased at depressed valuation, and the share count will keep growing. I like that compounding, even if it's purely the share count. I care about valuation when I have a chunk of cash to invest. I care about valuation at the point I sell shares, which is almost never. I care about valuation if the earnings and dividends are stagnant or dropping, that's for sure. But what about a quarter with soft earnings? What about 2-3 quarters, or even a year? What about McDonalds? What about Coca Cola?
Too much noise...what would happen if I just shut it all off and came back 5 years from now? Leave the DRIPS in place, forget about balancing, just wander off and do something more interesting and find out what's still standing 5 years from now.
I thought there was a bolus of new cash coming into the retirement portfolio. I finally figured out where to look and my last year's contributions are complete. So, I can go back to worrying about what's in there, not what to buy next. Back to watching the ticker, as if I could ever stop. Back to watching those dividends hit the account. Back to sitting on my hands.
Saturday, January 31, 2015
Saturday, January 10, 2015
Stock for sale
Selling...
Sell; a bad word, one I'd prefer to avoid uttering. No one wants to talk about selling stock. The few, the brave, tackle it now and again.
Why is it a bad word? Well, if you sell you may realize gains, or not. If so, it may be a tax generating move. If you sell at a loss, you've lost. Bad choice, unforeseen circumstance, incomplete data set; something, but still a loss and the regret of not foreseeing what was coming.If you sell because you need cash, you reduce the size of your engine. If you sell to rebalance, you're probably cashing in a winner, rotating from your faster horse to a slower one. If you sell an "overvalued" stock, you are obligated to have an idea in mind for where you'll invest that cash. We all know cash is slowly losing against inflation.
So, I'm not predisposed to sell stock. The Oracle himself said that his ideal holding period is forever.
Some very smart older investors in the pages I read say sell never, or rarely. I like that advice, because it relieves me of the concern that there will be many of the circumstances that warrant serious consideration of selling shares. It also tells me that the one of the key factors in avoiding the need to sell a stock is the nature of the decision to buy in the first place.
Investors have different names for their foundational holdings. Core stocks, "forever stocks", high conviction stocks, widows and orphans stocks are all names applied to the ones you intend to buy and never sell. Food never goes out of style and never is made obsolete by advances in technology. Toilet paper and toothpaste appear to have the same qualities. Electricity, water, telecommunications are similar in eternal necessity and appeal. In the last century, this one and perhaps the next, petroleum products seem to be similarly necessary, although supply, demand and prices can be pretty volatile. Buildings to house ourselves and our businesses appear to be a very stable place to invest, in general.
With a bit of attention to detail, purchase of such companies comes down purely to a "at what price" decision. The proverbial "margin of safety" fairly quickly gives one room to tolerate a significant downdraft and still have an asset the performs well over the long haul, and throws off cash on which you can live. Once purchased, you can basically forget about them, reinvest dividends until you need them, and rest assured that they will be there far longer than you will, continuing to generate income.
Many investors have another class of stocks that are not core, but are still considered to be long term holds for capital appreciation, income or both. Technology stocks are often thrown into this category. One doesn't know if they will be around 30 years from now or in what form, but in the intermediate term future they appear to be vital to our economy and are pumping out lots of cash. Many cyclical industrial stocks fit into this category. Again, the purchase decision is the key decision, and selling is either based on a target amount of appreciation, the end of a business cycle or some kind of horrible disruption that couldn't be anticipated.
Finally, there are the speculative investments. No earnings, no income, lots of potential growth, but who knows if they will be the winner or a competitor will leave them in the dust. Here's the problem; they are by nature volatile, the story may take many years to play out, and one may see paper losses long before being ready to take gains. I've learned that this kind of investing just gives me too much heartburn and it's not for me. So rather than worry when to sell, I just won't buy in the first place.
So what about those other "sell rules"? What about flattening of the earnings curve? What about declining rate of dividend growth, freeze or cut? What about "fundamental changes in the business"?
I don't have adequate experience in exercising these sell rules, so the best I can say is that I'll look at each of these on a case to case basis, hope that I hear the rumors before the facts occur on the ground and hope I don't show up too late to the "sell" party, when the losses have already been severe.
Since the reasons for "crisis selling" are infrequent and I am holding somewhere around 50 ownership positions, I can withstand a 50% loss in one position with a mere 1% effect on the overall portfolio value; roughly the dividend payout of a single quarter for my portfolio. That is the value of diversification.
One thing I'm learning about stocks that lose a lot of value; the reason they lost the value is generally the same reason they aren't likely to roar back to even, unless they are a victim of a smear campaign or some market irrationality. If the reasons are internal to the management, sales or earnings, then one is best choosing another horse to ride back to the barn. That's where the cold, emotion-free, attachment-free, no-pride attitude comes in. No basketball player I know shoots 100%.
After a missed shot, they come back and shoot again. In investing, the missed shot has to be completed by a "sell". Otherwise, that piece of the game just comes to a halt. I am amazed at how quickly the "hurt" in a loss goes away after you turn it into cash. When it hurts most is while you are holding that depreciated asset, hoping things will magically turn around and roar back like your original thesis foretold.
I've begun to pay more attention to what the most mature voices I read call "quality" in companies. Some use credit ratings on debt as a metric for quality. They also depend on the duration of the dividend and earnings history, payout ratio and other indications of safety of the dividend. Given that dividend freezes, cuts and suspensions all are value killers, it makes sense to focus on dividend coverage for those companies that make a point of paying significant dividends. Since those are the companies I like to buy, I'm going to start paying more attention to how one distinguishes quality in the earnings/dividends and debt rating. Then that ugly "sell" word won't need uttering very often.
Sell; a bad word, one I'd prefer to avoid uttering. No one wants to talk about selling stock. The few, the brave, tackle it now and again.
Why is it a bad word? Well, if you sell you may realize gains, or not. If so, it may be a tax generating move. If you sell at a loss, you've lost. Bad choice, unforeseen circumstance, incomplete data set; something, but still a loss and the regret of not foreseeing what was coming.If you sell because you need cash, you reduce the size of your engine. If you sell to rebalance, you're probably cashing in a winner, rotating from your faster horse to a slower one. If you sell an "overvalued" stock, you are obligated to have an idea in mind for where you'll invest that cash. We all know cash is slowly losing against inflation.
So, I'm not predisposed to sell stock. The Oracle himself said that his ideal holding period is forever.
Some very smart older investors in the pages I read say sell never, or rarely. I like that advice, because it relieves me of the concern that there will be many of the circumstances that warrant serious consideration of selling shares. It also tells me that the one of the key factors in avoiding the need to sell a stock is the nature of the decision to buy in the first place.
Investors have different names for their foundational holdings. Core stocks, "forever stocks", high conviction stocks, widows and orphans stocks are all names applied to the ones you intend to buy and never sell. Food never goes out of style and never is made obsolete by advances in technology. Toilet paper and toothpaste appear to have the same qualities. Electricity, water, telecommunications are similar in eternal necessity and appeal. In the last century, this one and perhaps the next, petroleum products seem to be similarly necessary, although supply, demand and prices can be pretty volatile. Buildings to house ourselves and our businesses appear to be a very stable place to invest, in general.
With a bit of attention to detail, purchase of such companies comes down purely to a "at what price" decision. The proverbial "margin of safety" fairly quickly gives one room to tolerate a significant downdraft and still have an asset the performs well over the long haul, and throws off cash on which you can live. Once purchased, you can basically forget about them, reinvest dividends until you need them, and rest assured that they will be there far longer than you will, continuing to generate income.
Many investors have another class of stocks that are not core, but are still considered to be long term holds for capital appreciation, income or both. Technology stocks are often thrown into this category. One doesn't know if they will be around 30 years from now or in what form, but in the intermediate term future they appear to be vital to our economy and are pumping out lots of cash. Many cyclical industrial stocks fit into this category. Again, the purchase decision is the key decision, and selling is either based on a target amount of appreciation, the end of a business cycle or some kind of horrible disruption that couldn't be anticipated.
Finally, there are the speculative investments. No earnings, no income, lots of potential growth, but who knows if they will be the winner or a competitor will leave them in the dust. Here's the problem; they are by nature volatile, the story may take many years to play out, and one may see paper losses long before being ready to take gains. I've learned that this kind of investing just gives me too much heartburn and it's not for me. So rather than worry when to sell, I just won't buy in the first place.
So what about those other "sell rules"? What about flattening of the earnings curve? What about declining rate of dividend growth, freeze or cut? What about "fundamental changes in the business"?
I don't have adequate experience in exercising these sell rules, so the best I can say is that I'll look at each of these on a case to case basis, hope that I hear the rumors before the facts occur on the ground and hope I don't show up too late to the "sell" party, when the losses have already been severe.
Since the reasons for "crisis selling" are infrequent and I am holding somewhere around 50 ownership positions, I can withstand a 50% loss in one position with a mere 1% effect on the overall portfolio value; roughly the dividend payout of a single quarter for my portfolio. That is the value of diversification.
One thing I'm learning about stocks that lose a lot of value; the reason they lost the value is generally the same reason they aren't likely to roar back to even, unless they are a victim of a smear campaign or some market irrationality. If the reasons are internal to the management, sales or earnings, then one is best choosing another horse to ride back to the barn. That's where the cold, emotion-free, attachment-free, no-pride attitude comes in. No basketball player I know shoots 100%.
After a missed shot, they come back and shoot again. In investing, the missed shot has to be completed by a "sell". Otherwise, that piece of the game just comes to a halt. I am amazed at how quickly the "hurt" in a loss goes away after you turn it into cash. When it hurts most is while you are holding that depreciated asset, hoping things will magically turn around and roar back like your original thesis foretold.
I've begun to pay more attention to what the most mature voices I read call "quality" in companies. Some use credit ratings on debt as a metric for quality. They also depend on the duration of the dividend and earnings history, payout ratio and other indications of safety of the dividend. Given that dividend freezes, cuts and suspensions all are value killers, it makes sense to focus on dividend coverage for those companies that make a point of paying significant dividends. Since those are the companies I like to buy, I'm going to start paying more attention to how one distinguishes quality in the earnings/dividends and debt rating. Then that ugly "sell" word won't need uttering very often.
Thursday, January 1, 2015
Some ideas on the effect of dividend cuts on one's DG investing fortunes
The average DG investor appears to hold less than/equal to 50 individual equities in his/her portfolio. From the conversations I have monitored here over the years, that seems to be the outer margin of companies that the average individual investor can keep track of.
The early phase of the investor's history is accumulation. That includes accumulation of value, but also accumulation of the portfolio team members. During that phase, most of the attention is paid to performance; earnings growth, capital appreciation, and in the case of the DG investor, rising dividends and cash flow within the portfolio. The "protect your capital" and "protect your income stream" ideas don't seem to be so prominent until one passes through the accumulation phase and into the living-on-distributions phase.
While it is true that a wage earner will not suffer a cash flow crisis as long as the next pay check is coming along, the distinction between accumulation phase and distribution phase from the standpoint of capital preservation is arbitrary. Protecting capital earlier in one's investing history actually has an outsized effect on one's security in the long run, as one is likely to be more vulnerable to discrete losses early in one's investment history. First, there's the experience thing. Second, there's the relative lack of diversification as one builds the number of positions over time. Third, there's the opportunity loss of future earnings if one makes a big mistake with assets that could have 30-40 years to compound if carefully protected.
A dividend cut is a capital killer. It is a symptom of an engine that is failing. Earnings are failing, and the company turns it's resources inwards as it attempts to repair the damage. The company may recover its valuation completely over time but that dividend is your electric bill if you're in the distribution phase.
The investor is faced with a set of challenges; should you do nothing? should you wait and then respond to dividend cuts? Should you anticipate them and attempt to abandon/switch ownership before such an event happens? Avoiding capital losses seems to mandate the anticipate/avoid strategy.
Dividend cuts are always proceeded by something. The company management and board make a decision based on their view of the near term future. They see a threat to earnings, or they have already realized the damage and are now attempting to repair it. They need cash for something other than the dividend. The question is, can you (the owner) anticipate these events and choose to change ownership before the ship hits rough water?
What do you have at your disposal?; You can wait for the announcement of a dividend cut. Problem is, valuation has already taken a big hit by then.
You can look for signs of impending trouble. What might these be?
Deceleration of earnings growth
Deceleration of dividend growth
Rising payout ratio
Rising debt
rising ratio of debt to free cash flow, enterprise value or other similar ratios
Oh boy... that means monitoring. How many data points? How often? what to do with warnings? watch list? sell? what to do with the cash?
Can you innoculate the portfolio against the kind of companies that could face a dividend cut?
credit rating? Payout ratio? Cap on dividend yield?
eyes closing, rounds and surgery on New Year's Day, must pack it in.
The early phase of the investor's history is accumulation. That includes accumulation of value, but also accumulation of the portfolio team members. During that phase, most of the attention is paid to performance; earnings growth, capital appreciation, and in the case of the DG investor, rising dividends and cash flow within the portfolio. The "protect your capital" and "protect your income stream" ideas don't seem to be so prominent until one passes through the accumulation phase and into the living-on-distributions phase.
While it is true that a wage earner will not suffer a cash flow crisis as long as the next pay check is coming along, the distinction between accumulation phase and distribution phase from the standpoint of capital preservation is arbitrary. Protecting capital earlier in one's investing history actually has an outsized effect on one's security in the long run, as one is likely to be more vulnerable to discrete losses early in one's investment history. First, there's the experience thing. Second, there's the relative lack of diversification as one builds the number of positions over time. Third, there's the opportunity loss of future earnings if one makes a big mistake with assets that could have 30-40 years to compound if carefully protected.
A dividend cut is a capital killer. It is a symptom of an engine that is failing. Earnings are failing, and the company turns it's resources inwards as it attempts to repair the damage. The company may recover its valuation completely over time but that dividend is your electric bill if you're in the distribution phase.
The investor is faced with a set of challenges; should you do nothing? should you wait and then respond to dividend cuts? Should you anticipate them and attempt to abandon/switch ownership before such an event happens? Avoiding capital losses seems to mandate the anticipate/avoid strategy.
Dividend cuts are always proceeded by something. The company management and board make a decision based on their view of the near term future. They see a threat to earnings, or they have already realized the damage and are now attempting to repair it. They need cash for something other than the dividend. The question is, can you (the owner) anticipate these events and choose to change ownership before the ship hits rough water?
What do you have at your disposal?; You can wait for the announcement of a dividend cut. Problem is, valuation has already taken a big hit by then.
You can look for signs of impending trouble. What might these be?
Deceleration of earnings growth
Deceleration of dividend growth
Rising payout ratio
Rising debt
rising ratio of debt to free cash flow, enterprise value or other similar ratios
Oh boy... that means monitoring. How many data points? How often? what to do with warnings? watch list? sell? what to do with the cash?
Can you innoculate the portfolio against the kind of companies that could face a dividend cut?
credit rating? Payout ratio? Cap on dividend yield?
eyes closing, rounds and surgery on New Year's Day, must pack it in.
resolutely resolving
The clock just turned into the new year. One minute to the next. What is significant about that? Why do we celebrate one minute, one day? Isn't it all a continuum? If one needs to mark a waypoint, then why not mark it with a significant resolution? New Years Resolutions...made to be broken, right?
what makes that rare beast, the resolution one keeps? I wish I knew.
What about my retirement investing life? What could happen in the new year? In the last year I saw a 10+% growth in value, not counting new contributions. I suppose the market could take it all back, even more. What would that do to my resolve? Am I convinced enough to stay the course? I know one thing; higher or lower valued, the portfolio will spin off 35k plus another 5-7% in dividends, so perhaps 37k. I'll add another 55k in contributions, for 92k. That could mitigate nearly 10% against a down-draft. If the valuation stays even, the dividend plus new contributions will grow the corpus by nearly 10%. If valuations rise, the corpus could rise further than 10%.
We have a richly valued stock market, margin compressions in many industries for this reason and that, prospects for rising interest rates that tend to depress the value of multiple types of investment. I guess I shouldn't keep my hopes up for the most optimistic scenario in valuation.
So, will I stay the course? I can't see an alternative. Am I disciplined enough to critically monitor my holdings? Funny; some of the best minds I know say buy, hold forever. That takes some of the pressure out of monitoring. That means that the most important question is, did I make prudent purchases? As I scan my portfolios, it seems like I did. I culled out the bad ones. There's a reason for every position I hold.
So, I resolve to stay the course. I resolve to only sell when something goes fundamentally wrong with a business. I resolve to only buy stocks that I will hold even if they lose 25% or more of their value in the short term. I resolve to focus on rising dividends, reinvestment, watching share counts grow, income grow, watching earnings, margins, payout ratios and trying not to look so often at the valuations. I resolve to believe that the US economy is the most resilient one in the world, the safest store of wealth, the one with the brightest long term prospects over time. I resolve to keep reading, constantly. I resolve to engage in conversation with peers. I resolve to be respectful and constructive in my comments. I resolve to keep an eye on the goal with each purchase, each balancing move. I resolve to only buy more stock if the valuation is acceptable, not just because cash is burning a hole in my pocket.
tall order, but since I have been practicing all this, there's a reasonable chance I will pull it off.
Happy New Year.
what makes that rare beast, the resolution one keeps? I wish I knew.
What about my retirement investing life? What could happen in the new year? In the last year I saw a 10+% growth in value, not counting new contributions. I suppose the market could take it all back, even more. What would that do to my resolve? Am I convinced enough to stay the course? I know one thing; higher or lower valued, the portfolio will spin off 35k plus another 5-7% in dividends, so perhaps 37k. I'll add another 55k in contributions, for 92k. That could mitigate nearly 10% against a down-draft. If the valuation stays even, the dividend plus new contributions will grow the corpus by nearly 10%. If valuations rise, the corpus could rise further than 10%.
We have a richly valued stock market, margin compressions in many industries for this reason and that, prospects for rising interest rates that tend to depress the value of multiple types of investment. I guess I shouldn't keep my hopes up for the most optimistic scenario in valuation.
So, will I stay the course? I can't see an alternative. Am I disciplined enough to critically monitor my holdings? Funny; some of the best minds I know say buy, hold forever. That takes some of the pressure out of monitoring. That means that the most important question is, did I make prudent purchases? As I scan my portfolios, it seems like I did. I culled out the bad ones. There's a reason for every position I hold.
So, I resolve to stay the course. I resolve to only sell when something goes fundamentally wrong with a business. I resolve to only buy stocks that I will hold even if they lose 25% or more of their value in the short term. I resolve to focus on rising dividends, reinvestment, watching share counts grow, income grow, watching earnings, margins, payout ratios and trying not to look so often at the valuations. I resolve to believe that the US economy is the most resilient one in the world, the safest store of wealth, the one with the brightest long term prospects over time. I resolve to keep reading, constantly. I resolve to engage in conversation with peers. I resolve to be respectful and constructive in my comments. I resolve to keep an eye on the goal with each purchase, each balancing move. I resolve to only buy more stock if the valuation is acceptable, not just because cash is burning a hole in my pocket.
tall order, but since I have been practicing all this, there's a reasonable chance I will pull it off.
Happy New Year.
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