frommi
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Posts posted by frommi
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Interesting fact: Even though this was a list of 108 companies, the list has outperformed the market by more than 5% over the last 5 weeks. So it looks like even with this amount of companies, diversification doesn`t mean the returns will be similar to the index. The companies with the highest yields outperformed by ~6% up to now.
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Just saying ..
Thought about that a bit deeper and came to the conclusion that closing the hedges with a small gain is a good idea. :)
But what i originally meant with my posting was stupid short term trades in stocks like the one i did with NFLX, that was really a stupid idea.
I will still trade short futures against my portfolio, thats were all my gains came from the last two years. But that is always with a predetermined setup and stop. Even though i prefer to do it only in the summer, because the probabilities for success are much higher there i will do it from time to time in the winter, too. Just to be safe, i hate losing money like the plague.
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I was listening to an interview with Sam Zell in December and he had this to say: “I always ask myself: where is demand coming from? Where is growth coming from? And then I try to align my investments with the most plausible answers.”
I recently read that this leaves the most important factor out and that is supply. This is not an argument against healthcare, but without supply you know nothing about the attractiveness of a sector. Look at oil, demand is growing since decades, but does it mean oil prices will go up?
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Haha thanks for the kind reminder
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Against my rules i started to hedge with Russel2k and S&P500 futures. I am afraid that we take another 10% dive and i think the probabilities for that have increased a lot today. But i stay flexible going forward. Looks a bit like 2016 is going to be a replay of 2008, only that the ugly stuff happens in energy & materials instead of financials.
May I ask why you see another 10% down based on today's news?
My view is you don't get a real liquidity event without a financial crisis - and if that happens, it might be European.
Its not the news that gave me that insight but the uptrend violation in the Russel2k and now in the S&P500, too. That doesn`t normally happen in a broad based recovery from a low.
We have that liquidity crisis already, the oil producing countries are dumping their foreign assets. Thats probably the reason why oil and stocks are so correlated right now.
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Against my rules i started to hedge with Russel2k and S&P500 futures. I am afraid that we take another 10% dive and i think the probabilities for that have increased a lot today. But i stay flexible going forward. Looks a bit like 2016 is going to be a replay of 2008, only that the ugly stuff happens in energy & materials instead of financials.
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This is exactly what I mean. You have more of what the market disproportionately rewards. You had a lot of energy a couple of years ago and today or when it becomes really cheap you will have none. You were 50% invested in technology & telecom in 2000. 35% in banks in 2007,..... . An index investor participates fully in all bubbles. Apart from the performance there is also the volatility of the index. By avoiding all 'popular themes' in your portfolio you can avoid a lot of the huge market swings and sleep a little bit better.
Thats what holds me back of investing in the index now, tech and healthcare make up 35% of the S&P500 at the current point. That is a similar dislocation like in 2000, so going forward its probably easier to beat the market simply by not investing in these two sectors.
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The easiest way to outperform is to buy an index fund. You'll outperform 90%+ of other investors.
You should probably ask why you want to outperform, anyway. Is being a multi-millionaire at retirement not enough for you, or is it the thrill of the hunt? I understand the thrill of the hunt. Not being satisfied with only being in the lowest caste of rich people is kind of silly.
Maybe because it stimulates the mind and you learn more every day. Pure index investing is to boring for me to work as an investment strategy. And being a multi millionaire only in retirement is a bit late, life is short. :)
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Looks like deflation is now a mainstreet thesis. I really doubt that the majority will be right on macro calls, so maybe its time to switch. When you look at inflation ex energy it doesn`t look that bad, so when oil prices normalize its possible that inflation picks up again.
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Sometimes i really question whether what he talks is what he does. I mean he speaks about investing in industries without rapid change and then invests a lot of his money into cyclical car companies where every 2 years a new carmodel has to be created and competition is intense? That makes no sense to me, but who am i to question him?
And i think he is wrong on Netflix, because they indeed become a very valuable content company going forward, financed with overvalued stock and float like Amazon. But that of course doesn`t make the stock a good buy right now, or at least its very hard to figure out if it does. But these bubble valuations in the NSDQ are probably worth looking at, maybe its a good idea to use QQQ as a hedge going forward over the summer.
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There are so many moving parts like interest rates, inflation or USD thats its pretty impossible to figure out what S&P500 earnings will do over the course of the next few years. But you can be sure that in 10-20 years earnings will be higher than they are now.
When you know where interest rates, inflation or the USD go, why bother with equities? Just speculate directly on them with futures.
If you are not able to figure out what happens there, than probably buying cheap stocks is whats going to work over the long run.
Oh and i think i figured something important out for myself. If you want to outperform the market over the long run, you first have to give up on trying to outperform it.
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Long-term average is around 6-7%. We were closer to 10%. Falling back to 6.5% would erase about 30-40% of the S&Ps earnings, but you'll notice that when reverts it generally goes below the average. This is why John Hussman calls it "mean inversion" instead of "mean reversion". If you get profits that fall by 30-40%, you can be almost positive you're going to get multiple contraction on top of that. If multiples fall from the current 17x to 12x, you're talking about a 55% decline in stocks to get what is still a reasonable multiple on average margins.
This is what I've been pointing for the past two years. We don't need a depression. We don't need a recession. We don't need a collapse of the financial system. A 50-60% decline occurs if we only go back average margins and average multiples. You're setting yourself for long-term failure in U.S. stocks in my opinion.
Maybe that is because IT (20%) and healthcare (14%) have now a much bigger and financials a lower weight in the S&P500 than 10-20 years ago?
Now that the market has fallen below the august low, i have to agree that the technicals really look weak. Easily possible that we started a bear market that takes us 40% lower from here over the next 2-3 years. But don`t forget that even bear markets have rally`s. :)
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frommi,
Any european names among the 45 picks? I hope you will share with us, thanks in advance.
Nestle and Unilever. I will not make 15% on these stocks, but solid 7-10%. Better than cash. www.suredividend.com is a pretty good site for these type of stocks.
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Reasons to short:
High margins (which have started to decline)
High multiples (which appear to be declining)
Liquidity leaving the system and interest rates rising
The best inflation environment you could ask for - price stability. (i.e. it can only get worse from here)
Relative value in other countries is huge
Global growth is slowing
Commodities flashing massive warnings signs
and now you have technicals moving to favor bears. That's a lot of current to be swimming against.
Perhaps you should really look at some stocks. WMT,KO,JNJ,PG,CL for example (this where just the first 5 stocks i had in my mind). All have declining or stable margins in the last 5 years.
Even for AAPL the margins are pretty stable.
Commodities going down is what they have done the last 250 years.
Global growth slowing - yes ok thats a valid point, and the USD apprecation is not helping. But its a temporary problem.
Market technicals - nothing to worry about at the moment. If we take out the August 2015 lows we are in a different game.
Reason not to short:
Wrong time. I never short in the winter months, you are just playing against the odds. Most corrections in winter are over very fast. But who knows, maybe i am wrong. The market is sometimes a bitch.
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Let me clarify - a global financial crisis that cripples the majority of western economies at a single time is likely a generational event. My point is you don't need that for a stock market to fall 50%. There have been plenty of severe market corrections of 30%, 40%, and 50% that aren't accompanied by a complete global meltdown. I'm not banking on a complete global meltdown.
I'm banking that U.S. equities are the third most expensive they've ever been. They are significantly over valued on just about every single long-term metric. Just reverting to the mean would result in losses of 50-60%. You don't need a global financial crisis at this point to spark significant losses.
I just built a diversified large cap blue chip portfolio with 45 names. None of them was overvalued. Maybe there are overvalued names in the indices, but at the current point at least half of the market is fair or undervalued.
And at the same time the sentiment is more negative then it has ever been in 08/09, thats the recipe for a big rally.
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frommi, can you walk us through your math for the 15%? when i play with numbers, i get only a 75 bps opportunity cost hurdle to get similar results AT (assuming a 10 year hold on the passive index vs. a typical 3 yr hold for the "trade" approach.
https://docs.google.com/spreadsheets/d/1bA3Nv5YwiYIJ5Vdha1YrN3A_kyhF65N5LZvoskK86-c/edit?usp=sharing
At the bottom there is a timetable. I pay ~26% taxes regardless of holding period and i calculated with a 1 year holding period vs. infinite holding period. If that is realistic is on another paper, and that is maybe the flaw in my thinking. Thanks for the response.
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Responding to the subject line, I personally don't care in an absolute sense. Just depends on what I'm looking for. For example, I've owned NLY for 6 or 7 years. I bought it for the dividend. But when I'm looking at stocks generally, I don't really care. I agree with Buffett; if operating cash can be reinvested at a high rate of return, why pay it out?
So you mean reinvested at high rates of return like for example VRX has done? Even Berkshire is struggling to get high rates of return on its capital lately. Sounds easier than it is in reality. The ideal business doesn`t need reinvested capital and growths without it. Doesn`t it make sense to pay it out as buyback or dividend?
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No, only reinvestment of dividends.
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I know of these etfs but why pay someone if i can do it myself? 0.1% every year of 1 million are 1000$ per year for nothing. I also want to create barriers to exit for myself and have the psychological benefit of dividend payments hitting the account every day. And if someday in the future vanguard choses to close the etf or increase the ter (see current lawsuit against them) you are screwed and have to pay the taxes and lose all benefits of doing it in the first place.
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Frommi,
I don't understand where you are getting the " i need 14-15% pretax returns with value investing to get the same results as just buy and hold indexing after taxes."
What do you mean?
Its all about after tax returns isn`t it? With 15% returns pretax at a 26% tax rate, i get ~11% after tax returns.
Here is my spreadsheet: https://docs.google.com/spreadsheets/d/1bA3Nv5YwiYIJ5Vdha1YrN3A_kyhF65N5LZvoskK86-c/edit?usp=sharing
Just curious why the 9% hurdle for dividend growth?
Its not a hurdle, it was the average growth rate of earnings & dividends over the past 10-20 years. There are utilities and REIT`s with lower growth rates included (but of course with higher yields).
If I had to invest in taxable account, I would have gone forever-hold or indexing long time ago. When you have 20%+ tax cost on gains, outperforming an index after taxes is pretty much impossible without forever-hold or similar.
(I probably should have done this in my tax advantaged accounts too. No taxes encourage bad trading behavior unfortunately... :( )
To answer frommi: No, haven't tried what you are suggesting. I think ETFs would be simpler/less trouble, but your idea might work.
There more i know the more i realize that i don`t know anything. The crux with value investing is that you rely on both the market being inefficient and at some time in the future being efficient and you being smart enough to find out when it is and when it isn`t. Since the future is unknown and all the value is in the future, how can anybody be sure about anything?
The dividend growth list has of course hindside and survivorship bias. So how reliable is past dividend growth to estimate future dividend growth?
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I`ve been playing around with numbers the last week and came to realize that i need 14-15% pretax returns with value investing to get the same results as just buy and hold indexing after taxes.
15% returns long only, full time invested for me looks like a pretty tough hurdle especially given the risks of underperformance and concentration necessary to reach these goals.
Now i am thinking about improving the index returns with equal weighting and a dividend growth approach. I started building a list and have now around 100 companies with a history of increasing dividends every year with an average yield of 3.0% and 9% historical growth. This comes down to 12% returns which is exactly what the original S&P500 companies that built the index in 1957 have returned, so it doesn`t seem to be that wrong.
I don`t like buying etf`s for indexing because i am too cheap to pay fees for nothing (and after buying there will be no additional fees with my approach), and there is always the risk that the etf someday will be closed and i lose the tax advantage. And its probably a lot harder to sell the complete portfolio, so psychologically its easier to maintain the approach for me than etf`s.
Has somebody else done it that way, or is it just a stupid idea?
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Should we value KMI like a utility?
Then its EV/EBITDA is not low at 12 plus
I know of no utility with an ROIC of 11-13% and i think that pipelines are more like real estate. Of course i can be wrong on that. And regarding the multiple i don`t trust the yahoo finance data and calculated myself with the debt/(net debt/ebitda multiple) in the latest presentation. That gives ~7.5 billion EBITDA and a EV of 75.5 billion for a EV/EBITDA multiple of ~10. This is in-line with some utilities, despite the fact that most utilities grow EBITDA by 1-3% and KMI by 8-10%. But please don`t trust me. :)
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Maybe a bit late, but my best ideas are
Spin offs:
CCP - Healthcare REIT, ~9 x FFO (TTM)
CABO - Cable company, ~10 x FCF (2016)
Stocks:
BBBY ~9 x ~FCF (TTM)
IBM ~10 x FCF (TTM)
KMI ~7 x DCF (TTM)
Oh and just in case oil and gas prices come back:
BXE
Hang in There!
in General Discussion
Posted
There is a study from Jeremy Siegel that shows that until 2006 the original 500 companies of the index in 1957 have outperformed the index, so i think its the wrong conclusion that they did a good job. You could have done better buying 500 stocks and leaving them alone. And you would have done even better if you equal weighted them at the start and left them alone.
A possible reason is that when they finally added a stock it was when it was overvalued, and maybe i am wrong but i think they just add the biggest marketcap companies in the US, so its not really active management.
My lesson from this is that concentration like it is preached all over the value investing community is the real reason why people underperform for long stretches of time. Maybe i am a bit harsh but in my view concentration adds a big variance to returns that is mainly good for one group of people, and that is hedgefund managers. They participate fully in the upside returns but only marginally in the downside, so because of their compensation structure they are incentivized to concentrate. Especially the ones that have a Buffet like compensation fee. Someone on 2+20 will probably diversify more, but the 2% ensures that all possible outperformance goes to the manager. But since most of us probably are not running hedgefunds, is it really wise to concentrate and miss the stock that makes all the difference?