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...
Tuesday, November 8, 2011
down, up, down, up
I'm guilty of doing exactly what the dividend growth investor shouldn't; watching my account values go up and down. If I had the correct view, I wouldn't do that, but Fidelity doesn't give me the option of watching projected dividend earnings, so I'm stuck with account values, positions and the like.
however, after several swings in the volatile market, I've convinced myself that I am not making emotional trades. Now I'm using the FASTgraphs site to look at fair value and stock price in relation to that, also looking at dividend growth in the past, and projections in the future, to guage whether my new purchases meet the margin-of-safety test.
Also, I've taken a big step and now am only working 3 weeks out of 4, using a week to clear my head and look to the future. Not clear yet what I'm seeing, but it's something other than what I've been doing for the last couple of decades.
I think I'm on the right track with the retirement portfolio. More and more of my holdings meet the criteria of undervalued or at fair value by reasonable estimates, have outsized dividends, reasonable payout ratios for their sector, and a history of revenue AND dividend growth. At the very least, I'm a reasonalbe disciple of the gospel of DG investing. In my few dabblings into growth, I've sucked a big egg on renewable energy and some other things; fortunately just a tiny piece of my portfolio, but the big losses and volatile swings make me remember why I abandoned that approach previously.
It's pretty clear that all the reading has paid off in a more focused set of voices to whom I listen and a more purpose-designed portfolio; just not certain yet that it's going to accelerate in the manner I hope. This is a long term strategy, so acceleration won't be at high-G force; rather a subtle building of momentum over time, but hopefully we'll be rocketing along down the line.
One can hope that the companies I have bought will continue their cost control discipline and continue to grow revenues in this tough world economy. If they do, and continue to distribute some of that as dividends, I'll fulfill my goal.
I think I may have between 4 and 9 years left of earning a wage; then I want to take my skills and use them elsewhere in the world without concern for earnings. I can't see the exact path to independence of the paycheck, but I can see the destination fairly clearly. It means changing my overall nest-egg expectation a bit, but then I don't expect to to be laid to rest on a bed of dollars.
more on that later...I'm working on unwinding some real-estate entanglements so I won't need the same paycheck to keep things afloat.
I'm going to read back a bit and see if I'm really any wiser or not.
however, after several swings in the volatile market, I've convinced myself that I am not making emotional trades. Now I'm using the FASTgraphs site to look at fair value and stock price in relation to that, also looking at dividend growth in the past, and projections in the future, to guage whether my new purchases meet the margin-of-safety test.
Also, I've taken a big step and now am only working 3 weeks out of 4, using a week to clear my head and look to the future. Not clear yet what I'm seeing, but it's something other than what I've been doing for the last couple of decades.
I think I'm on the right track with the retirement portfolio. More and more of my holdings meet the criteria of undervalued or at fair value by reasonable estimates, have outsized dividends, reasonable payout ratios for their sector, and a history of revenue AND dividend growth. At the very least, I'm a reasonalbe disciple of the gospel of DG investing. In my few dabblings into growth, I've sucked a big egg on renewable energy and some other things; fortunately just a tiny piece of my portfolio, but the big losses and volatile swings make me remember why I abandoned that approach previously.
It's pretty clear that all the reading has paid off in a more focused set of voices to whom I listen and a more purpose-designed portfolio; just not certain yet that it's going to accelerate in the manner I hope. This is a long term strategy, so acceleration won't be at high-G force; rather a subtle building of momentum over time, but hopefully we'll be rocketing along down the line.
One can hope that the companies I have bought will continue their cost control discipline and continue to grow revenues in this tough world economy. If they do, and continue to distribute some of that as dividends, I'll fulfill my goal.
I think I may have between 4 and 9 years left of earning a wage; then I want to take my skills and use them elsewhere in the world without concern for earnings. I can't see the exact path to independence of the paycheck, but I can see the destination fairly clearly. It means changing my overall nest-egg expectation a bit, but then I don't expect to to be laid to rest on a bed of dollars.
more on that later...I'm working on unwinding some real-estate entanglements so I won't need the same paycheck to keep things afloat.
I'm going to read back a bit and see if I'm really any wiser or not.
Sunday, June 12, 2011
Resisting temptation to give in to the doomsday-sayers
There's lots of not-so-good news out there. It seems the market rose through the spring in spite of the popular news; earnings were high, dividends increased, even as the world economy is under threat of a debt-crisis and there are signs of a slowing economic recovery in the US, as well as catastrophe in Japan and a real-estate bubble in China.
Now, in the traditional dog days of late-spring/summer, the market is now correcting. Some folks say store cash.
Others say you can't time the market. I'm no financial professional, just a guy trying to build a money-making machine that will secure my family and my old age, which is coming faster than I like.
I'm listening to and reading an increasing circle of voices; what comes through strongest is looking at companies that are steadily, increasingly profitable and willing to share some of that profit in the form of dividends. Some would argue that paying dividends is inefficient, exposing company profits to taxation in the hands of stockholders, rather than buying shares or re-investing profits in new production. Since I invest in pre-tax and tax-advantaged accounts, I'm not exposed to this taxation, so I'm DRIPing at 100% efficiency in re-investment. The issue about companies that pay dividends is management discipline in accountability to owners. The reason for a business's existence is to produce income for it's owners. Since the stock market doesn't perfectly value companies, sometimes for years at at time, dividends represent real tangible returns on the owner's investment. I'm watching yearly dividends rise; best I can tell, my annual dividend production has increased by about 1/3 in the last two years, considering both new investment and portfolio performance.
My goal is to build a portfolio that doesn't need retooling as retirement approaches, instead I hope it will simply continue to pump out dividend growth that will adequately fund the maintenance needs of my family. That means it needs to perform better than inflation and the dividend production needs to be at least equivalent to inflation at retirement. I have another 16 years before qualifying for SSI, so that means another $800k of contributions if I'm lucky. If the current corpus grows at 10%, I'll have an adequate income stream to fund a comfortable retirement and leave the corpus to my son and charities when I leave this mortal coil. In the mean time, I'm insured for the amount of money I'd otherwise earn at my current production, so if I can keep this level of performance, I'll meet my goals.
Trouble is, I see myself losing the drive to do what I've been doing the last 16 years. I'm not sure what is going to change, but something has to. I have deferred so much personal time that I am losing the desire to pick up those things I used to enjoy and start them up again. Cutting back on the amount of work means cutting back on earnings, possibly cutting back on deferrals and ultimate financial goals.
Then, who said I need all that much income in retirement? It's time to rethink all of that. Money doesn't buy time. Time runs out. Noone knows when the clock runs out. So, I think I'll run both programs as best I can; continue to defer all the income possible, live on a bit less and carve out a bit more time. That's about the best I can do under the circumstances, and hope my investment choices are sound. I'm no trader, so buy and hold will either work or it won't.
Increasingly, I'm listening to the "stocks you can own forever" kind of voices. I'm building positions in stuff that people will need in all climates: energy, staples, water, etc. I don't have the stomach for fliers, so I won't be scoring any 10 baggers. I'm steadily looking for opportunities to add international holdings, understanding that the old US of A is heading for disaster with unsustainable debt, an aging population and inevitable increase in taxation. That means the business performance is going to be elsewhere. Also, focusing on tax advantaged investment should continue to pay off.
In summary, I'm continuing to invest, willing to ride out the corrections in an "all in" orientation, as along as dividends flow and my positions can continue to grow.
Now, in the traditional dog days of late-spring/summer, the market is now correcting. Some folks say store cash.
Others say you can't time the market. I'm no financial professional, just a guy trying to build a money-making machine that will secure my family and my old age, which is coming faster than I like.
I'm listening to and reading an increasing circle of voices; what comes through strongest is looking at companies that are steadily, increasingly profitable and willing to share some of that profit in the form of dividends. Some would argue that paying dividends is inefficient, exposing company profits to taxation in the hands of stockholders, rather than buying shares or re-investing profits in new production. Since I invest in pre-tax and tax-advantaged accounts, I'm not exposed to this taxation, so I'm DRIPing at 100% efficiency in re-investment. The issue about companies that pay dividends is management discipline in accountability to owners. The reason for a business's existence is to produce income for it's owners. Since the stock market doesn't perfectly value companies, sometimes for years at at time, dividends represent real tangible returns on the owner's investment. I'm watching yearly dividends rise; best I can tell, my annual dividend production has increased by about 1/3 in the last two years, considering both new investment and portfolio performance.
My goal is to build a portfolio that doesn't need retooling as retirement approaches, instead I hope it will simply continue to pump out dividend growth that will adequately fund the maintenance needs of my family. That means it needs to perform better than inflation and the dividend production needs to be at least equivalent to inflation at retirement. I have another 16 years before qualifying for SSI, so that means another $800k of contributions if I'm lucky. If the current corpus grows at 10%, I'll have an adequate income stream to fund a comfortable retirement and leave the corpus to my son and charities when I leave this mortal coil. In the mean time, I'm insured for the amount of money I'd otherwise earn at my current production, so if I can keep this level of performance, I'll meet my goals.
Trouble is, I see myself losing the drive to do what I've been doing the last 16 years. I'm not sure what is going to change, but something has to. I have deferred so much personal time that I am losing the desire to pick up those things I used to enjoy and start them up again. Cutting back on the amount of work means cutting back on earnings, possibly cutting back on deferrals and ultimate financial goals.
Then, who said I need all that much income in retirement? It's time to rethink all of that. Money doesn't buy time. Time runs out. Noone knows when the clock runs out. So, I think I'll run both programs as best I can; continue to defer all the income possible, live on a bit less and carve out a bit more time. That's about the best I can do under the circumstances, and hope my investment choices are sound. I'm no trader, so buy and hold will either work or it won't.
Increasingly, I'm listening to the "stocks you can own forever" kind of voices. I'm building positions in stuff that people will need in all climates: energy, staples, water, etc. I don't have the stomach for fliers, so I won't be scoring any 10 baggers. I'm steadily looking for opportunities to add international holdings, understanding that the old US of A is heading for disaster with unsustainable debt, an aging population and inevitable increase in taxation. That means the business performance is going to be elsewhere. Also, focusing on tax advantaged investment should continue to pay off.
In summary, I'm continuing to invest, willing to ride out the corrections in an "all in" orientation, as along as dividends flow and my positions can continue to grow.
Sunday, January 16, 2011
Reexamining the DRIP
I have been DRIPing all my dividends, based on the fact that positions grow with no new commissions. I pay about $8 per trade with my broker, so most trades are costing me about 0.2-0.3%, as my average purchase is in the $3000-$5000 range. At the rate I contribute to my qualified plan, that allows me to purchase a new equity every other month or so. However, dividends are coming in about $2000/month. If I weren't doing the DRIP, I'd have twice as much to deploy on discrete purchases. The question is, am I smarter than the DRIP? DRIP means the entire portfolio grows at about 3+ percent per year, which is my average dividend yield. Were I to harvest dividends and use them to make discrete purchases, I'd need to do better than the average of my entire portfolio. Since valuations are up, there aren't many bargains out there. That might argue on the side of targeted purchase, as the DRIP program is purchasing in that environment. On the other hand, those few bargains will be companies whose stocks haven't moved with the market, forcing me to rely on my own analysis or the opinion of people I read on whether stocks that aren't moving are in fact good investments. My few non-dividend paying stocks don't see any position growth and that hasn't stopped me from holding them. Not being a momentum investor, I don't purchase more of them when they are rising, so I behave pretty differently with them than the DRIP program with dividend paying stocks.
Perhaps I should be purchasing the dividend-payers when they are down, rather than relying on the dollar cost averaging of the DRIP. I might be better at keeping average dollar cost of my purchases lower than the DRIP.
My portfolio software assigns no cost to the stocks purchased with the DRIP. This seems wrong, as If I took the cash and then purchased the stocks, it would register at the current price plus commission. On the other hand, I'm not putting new money in for these stocks, so this argues for the accounting as it currently stands. I guess it makes sense that internally generated returns should be handled differently than new cash contributions to the portfolio. I'm not quite ready to turn off all the drips. Perhaps it's better to sell a piece of the best performing stocks and reinvest in those with lower valuation and higher dividends. That would simply be a form of "rebalancing".
I think I'll go sleep on this one.
Perhaps I should be purchasing the dividend-payers when they are down, rather than relying on the dollar cost averaging of the DRIP. I might be better at keeping average dollar cost of my purchases lower than the DRIP.
My portfolio software assigns no cost to the stocks purchased with the DRIP. This seems wrong, as If I took the cash and then purchased the stocks, it would register at the current price plus commission. On the other hand, I'm not putting new money in for these stocks, so this argues for the accounting as it currently stands. I guess it makes sense that internally generated returns should be handled differently than new cash contributions to the portfolio. I'm not quite ready to turn off all the drips. Perhaps it's better to sell a piece of the best performing stocks and reinvest in those with lower valuation and higher dividends. That would simply be a form of "rebalancing".
I think I'll go sleep on this one.
Wednesday, December 29, 2010
are we climbing a wall of worry?
In my daily perusal of the blogosphere, I'm starting to see folks talking about indicators of a correction. So, I'm trying to understand what those indicators are. After all, when the valuations are rising, they are either doing so on the back of increased earnings, or on the back of market sentiment, and we know that in the short run, the market reflects the composite emotions of investors. We can be seized by elation or dispair, follow rumors, follow the proclamations of "experts", etc. Even the habit companies are in of offering "guidance"is a potential source of worry, or earnings expectations, which are then chewed and digested by analysts, who issue their own guidance, trying to anticipate what will actually happen. These predictions lead to the game of beating estimates, or falling short of estimates, which in turn drives short term volitility on stock prices.
I'm constantly being sucked back into that vortex of anxiety based review of holdings, wondering if they are "overvalued, undervalued, or fully valued". I have to remind myself that I've decided to behave differently. I've decided to buy a stream of income, and not pay too much for that stream. Over time, I want that stream to increase, both by new purchases, and by reinvestment of dividends. Over time, more of the growth in the income stream should be from the portfolio performance itself, rather than new contributions.
When one has 50-60 issues and demands a history of rising stream of dividends, it becomes less likely that new ideas are going to pop up that haven't been seen before. The program must therefore change to which ones represent the best risk-adjusted opportunity at the moment. If the value runs up ahead of a rising dividend stream, it probably makes sense to reposition into lower PE options, understanding that rising dividends should follow the streakers, or valuation should follow rising dividends. Either way, buying the dividends rather than looking for rising valuation probably drive new money. I'm headed over to the portfolio to see if this logic is applicable right now...
I'm constantly being sucked back into that vortex of anxiety based review of holdings, wondering if they are "overvalued, undervalued, or fully valued". I have to remind myself that I've decided to behave differently. I've decided to buy a stream of income, and not pay too much for that stream. Over time, I want that stream to increase, both by new purchases, and by reinvestment of dividends. Over time, more of the growth in the income stream should be from the portfolio performance itself, rather than new contributions.
When one has 50-60 issues and demands a history of rising stream of dividends, it becomes less likely that new ideas are going to pop up that haven't been seen before. The program must therefore change to which ones represent the best risk-adjusted opportunity at the moment. If the value runs up ahead of a rising dividend stream, it probably makes sense to reposition into lower PE options, understanding that rising dividends should follow the streakers, or valuation should follow rising dividends. Either way, buying the dividends rather than looking for rising valuation probably drive new money. I'm headed over to the portfolio to see if this logic is applicable right now...
Monday, December 6, 2010
what now?
So, some long time in since the last entry into the internal conversation I'm having with myself over this issue of managing my own retirement account. I examined another fee-based manager, am becoming more comfortable with the idea that I'll be doing it myself for the forseeable future. Too mistrustful, to frugal and adequately interested that noone else will do.
So what now. I'm pretty sure I'm not a momentum investor, no desire to learn anything about market timing, technical analysis. My newest grasp of concepts on the dividend growth front is that dividend payment is an indicator of disciplined management, rising dividends are an issue of corporate culture, and rising dividends drive rising valuation, as long as they are accompanied by rising earnings. So, if one can see solid prospects for rising earnings and a history of rising dividends, then one doesn't need to chase yield as much as chase growing yield. Actually, not growing yield, but rising dividend payments. Yield may not rise, if valuation is rising as the dividend rises. Yield on cost needs to rise, however.
So, since most of the "high-quality" issues circulating the newsletters and blogs have approached most writer's models of fair value, there aren't many bargains around. What's a guy to do? DRIP along, knowing that this fraction of the growing position is not being purchased with the same "margin of safety" that is so highly touted? Still, growth in position means rising dividend payments. Switch out of DRIPing and collect cash, hoping that a few bargains materialize for the growing pile of cash?
More than anytime in the last two years, now seems the time for significant patience in deploying cash, in spite of the internal pressure to be fully invested. There don't seem to be many "beaten down" gems in the dividend paying universe, so I'll keep reading all those newsletters, blogs and websites, trying to discern the nugget from the gravel of all that verbiage. I think I'll let the DRIP continue, understanding that it's a form of dollar cost averaging, and small increments purchased at higher prices doesn't negate the value of block purchases at opportune moments.
Since new money is flowing into the portfolio as I save for retirement, I still get the opportunity to either add new issues or build positions in companies of interest.
My portfolio numbers around 50 companies now; much larger than required for basic diversification, but it allows me to own a basket of stocks in various sectors, relieving me of the anxiety of choosing between the strongest companies in each sector. Provided I know what it is I am purchasing, I have been able to maintain familiarity with most all of them.
If I ever start doing fundamental analysis, I may need to pare down the list, but right now I'm feeling o.k. about letting better business heads than I do the calculating and I do the choosing between several voices I read and listen to.
It has produced a portfolio with approximately double the yield of the S&P 500, a beta of 0.8 and what appears to be a rising stream of dividend income. I trade a bit more than perhaps I should, but it's mostly about rebalancing and building positions in dividend growers.
I'm out of the options business for the time being; covered calls require repurchasing positions and capping returns in a rising market. When things start to go sideways, I'll get back into the covered calls and cash covered puts. I'm reading about the diagonal spread; sell short interval covered call, buy long interval in-the-money call, look for returns from both sides of the bet.
So what now. I'm pretty sure I'm not a momentum investor, no desire to learn anything about market timing, technical analysis. My newest grasp of concepts on the dividend growth front is that dividend payment is an indicator of disciplined management, rising dividends are an issue of corporate culture, and rising dividends drive rising valuation, as long as they are accompanied by rising earnings. So, if one can see solid prospects for rising earnings and a history of rising dividends, then one doesn't need to chase yield as much as chase growing yield. Actually, not growing yield, but rising dividend payments. Yield may not rise, if valuation is rising as the dividend rises. Yield on cost needs to rise, however.
So, since most of the "high-quality" issues circulating the newsletters and blogs have approached most writer's models of fair value, there aren't many bargains around. What's a guy to do? DRIP along, knowing that this fraction of the growing position is not being purchased with the same "margin of safety" that is so highly touted? Still, growth in position means rising dividend payments. Switch out of DRIPing and collect cash, hoping that a few bargains materialize for the growing pile of cash?
More than anytime in the last two years, now seems the time for significant patience in deploying cash, in spite of the internal pressure to be fully invested. There don't seem to be many "beaten down" gems in the dividend paying universe, so I'll keep reading all those newsletters, blogs and websites, trying to discern the nugget from the gravel of all that verbiage. I think I'll let the DRIP continue, understanding that it's a form of dollar cost averaging, and small increments purchased at higher prices doesn't negate the value of block purchases at opportune moments.
Since new money is flowing into the portfolio as I save for retirement, I still get the opportunity to either add new issues or build positions in companies of interest.
My portfolio numbers around 50 companies now; much larger than required for basic diversification, but it allows me to own a basket of stocks in various sectors, relieving me of the anxiety of choosing between the strongest companies in each sector. Provided I know what it is I am purchasing, I have been able to maintain familiarity with most all of them.
If I ever start doing fundamental analysis, I may need to pare down the list, but right now I'm feeling o.k. about letting better business heads than I do the calculating and I do the choosing between several voices I read and listen to.
It has produced a portfolio with approximately double the yield of the S&P 500, a beta of 0.8 and what appears to be a rising stream of dividend income. I trade a bit more than perhaps I should, but it's mostly about rebalancing and building positions in dividend growers.
I'm out of the options business for the time being; covered calls require repurchasing positions and capping returns in a rising market. When things start to go sideways, I'll get back into the covered calls and cash covered puts. I'm reading about the diagonal spread; sell short interval covered call, buy long interval in-the-money call, look for returns from both sides of the bet.
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