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  • 10 Rules For Your Own 'Perfect Investment Portfolio' [View article]

    I must tell you that you are making a mistake waiting for a drop in the market to buy. I may write an article to explain why... Except that a number of institutional clients pay us, among others, for that explanation and I may be breaking trust with them if I was to give the advice away for free on SA. On the other hand, they may already have invested, so it is no skin off their noses if our explanation becomes public at this point. Will discuss it internaly and will see.

    Must tell you that in 2006-2007 we advised everyone to raise cash with all their stocks. Our clients, being institutional equity players, could not and cannot do it. But they could raise cash more than usual and go to lower beta potfolios. Those who did are grateful continued clients and made up all the losses... and then some. A couple who did not, are not clients anymore: one of them lost over 60% of the assets they had under management (not all in the market but many of their clients left them) and cannot afford anymore the rather modest fee we charge. So we lost clients too. But acquired some new ones. That's how the world goes.
    Aug 19, 2012. 12:26 PM | 1 Like Like |Link to Comment
  • 10 Rules For Your Own 'Perfect Investment Portfolio' [View article]

    As a professional, having worked for a small institutional broker, pushed out of business by the "bulge-bracket" houses and running now, among others, a referral business to fee-only registered investment advisors, I cannot cease being amazed at how the retail brokers can retain any business in the presence of the on-line discount brokers.

    The retail broker's line has always been that they offered "advice". And to make it even more enticing, the advice was "free"... which means that s/he could only stay in business from commissions. Which, in turn, means that if the client does not buy and sell stocks with a certain frequency, the broker, who is on commission, starves or rather loses the job because otherwise his employer goes bankrupt. Don't you smell here a whiff of conflict of interests?

    Dave C.'s approach with self-managed DG portfolios is certainly an excellent idea, should your goal be to receive an income in excess of what the current fixed income vehicles can offer and you should consider yourself lucky to have stumbled upon his article series. With the Fed's low interest policy, fixed income, which used to be the realm in which people with Dave's goals were living, is an increasingly iffy proposition because the older, higher interest bonds are maturing and they have to be replaced by the current low yielding paper. Dave's DG strategy is a very reasonable alternative... that is if you trust yourself and have the time and stamina to (a) continuously select stocks that will not lead you to lose on the stock price everything that you gain on the dividend, and then some, and (b) permanently and vigilantly weed-out those that do not fit your requirements. It is feasible but, as Dave honestly explained, it ain't easy.

    IMHO you should also explore a few RIAs (Registered Investment Advisors). It is a motley crowd with outstanding individuals running their honest businesses to individuals who are honest but not able to deliver attractive results down to outright crooks. I am the first to admit that it is rather hard to tell which is which. In addition, if you do not have a substantial number of dollars to put in the account (in excess of $ 1 mil.), your business may not be very attractive for what the profession knows as a "segregated account", i.e. have the RIA manage your money JUST FOR YOU. The RIA may put you in one of his "collective vehicles" or mutual funds (or by whatever name it is run) which I would strongly advise you to avoid.

    Therefore, if you have under $1 mil. to invest, you would be well advised to make the effort and follow what Dave is doing with his remarkable income strategy. Or, take the bull by the horns and develop your own approach for a "wealth enhancing" strategy, i.e. benefit from the price increase of stocks with at least part of your money. Our research indicates that this is a good time to do it in CAREFULLY SELECTED US stocks for another 5-7 years. But if you go that route, watch like a hawk for the signs of a "top" which is bound to come. Only God knows exactly when, but if you are caught at that time in what's termed as "growth equities" or "value equities", beware! Even Dave can get hurt in such a market.

    Just my two-penny worth... Good luck to you.
    Aug 17, 2012. 06:15 PM | Likes Like |Link to Comment
  • 10 Rules For Your Own 'Perfect Investment Portfolio' [View article]

    You are gracious - as always. Nice of you to ask about my life. I am quite busy with my little business.

    As for SA, I just published two articles. Would be curious of your take although they are not along the lines of DG. But, as you say, there are numerous ways to win (and to fail) in the market.
    Aug 17, 2012. 11:44 AM | Likes Like |Link to Comment
  • 10 Rules For Your Own 'Perfect Investment Portfolio' [View article]
    Makes sense Dave. Thank you for the response(s).
    Aug 16, 2012. 07:51 PM | Likes Like |Link to Comment
  • 10 Rules For Your Own 'Perfect Investment Portfolio' [View article]
    Your 10 principles should be made part of the curriculum in teaching portfolio managers how to run their business. This is not an empty compliment: I am dead serious about it.

    I am coming to SA from the point of view of the professional whose goal should be to satisfy those who cannot or would not make the effort you and your more faithful readers make but need to manage their money anyway. It is a majority and they are frequently entrusting their wealth, particularly when that wealth is on the modest side, to portfolio managers to whom they should not give their confidence.

    Most of those who offer advice in this business, do talk (extensively) about the investor’s goals. The difference you make is that you offer at least one specific way of pursuing those goals, rather than, what most do, determine whether you want to put your kids through college, provide for your retirement, etc. These are “life goals” not “investment goals”. Your merit is that you address the investment goals that should be established in order to achieve one’s life goals.

    A sentence did catch my eye in your piece: “If a company does not increase dividends on an annual basis for 5 straight years, it does NOT mean that the company is not worthy of your investment dollars. All it means is that this particular company is NOT a Dividend Growth stock.” It is along the lines of setting goals which you emphasize, so it is consistent with the logic of your approach.

    What I would appreciate having you elaborate on is how do you determine that a company is likely to continue the 5 year stream of dividends that you seek. The “anti-dividend school” maintains that a company that pays out dividends is in fact wasting its capital and that the payment of dividends is ultimately an admission that the company does not really know how to invest for a higher return on the capital it created. If it did, it would be offering value which an investor can realize by simply selling some of the stock.

    I admit that this is a more difficult and a more demanding portfolio management proposition than seeing in your hand (well, in your account), the dividend quarter after quarter: a bird in hand is worth two in the bush. But doing it this way, aren’t you investing in companies which are implicitly less capable custodians of their investors’ capital?

    Not to mention the tax aspect: dividends are taxable income to the investor after the government has already taxed the income of the company paying the dividend. Yes, capital gains are taxed too but they are a reflection of the company’s overall growth as reflected in its market valuation. So the effort is not taxed twice.
    Aug 16, 2012. 01:03 PM | 3 Likes Like |Link to Comment
  • It's Time For Stock Picking [View article]
    Dear 4ran5par3n4:

    Your response to my comments, which I had solicited, are gratifying and I appreciate them very much. Many thanks for your gracious acknowledgement.
    Aug 14, 2012. 09:15 AM | Likes Like |Link to Comment
  • It's Time For Stock Picking [View article]
    Dear 4ran5par3n4:

    The % change of the earnings "is" the velocity of change of earnings. I do not understand the difference you make.

    Graphing the velocity would certainly give you a line crossing 0 each time a maximum or a minimum is reached. But that graph catches a different aspect of the process and is BY NO MEANS comparable with the growing sinusoid which theoretically describes the resonance phenomenon in engineering systems like pumps, bridges and the like which exhibit behaviors very close to the theoretical concept the sinusoid describes.

    What worries me is the similarity between the graphs describing two apparently unrelated phenomena: the physical resonance and the economic earnings. It may be a fortuitous similarity as I mention in the article. Just having an empiric resemblance without a theory can lead easily to false results. But may be not. Actually a coherent theory for the oscillations of the economy does exist. But it is quite controversial and, dealing with a human phenomenon, which the economy is, cannot be proven by lab tests, where in the physical world you can isolate, at least to some extent, specific influences (factors)... And controversy exists even there....

    But this conversation pertains to that older article. Would you have any comments to this article? I would appreciate to read your opinion.
    Aug 11, 2012. 08:22 AM | Likes Like |Link to Comment
  • It's Time For Stock Picking [View article]
    Dear Stock Trader,

    Your two picks certainly seem to be very attractive. However, in the world in which I make a living, what you describe, while important, comes at the end of the analysis which looks at cash flows, projected cash flows, asset growth, earning growth, quality of earnings, etc.

    The "timing", again in my world which does not have to be everybody's way of looking at things, comes from establishing that a stock which has been disappointing sell-side analysts for quite some time, all of a sudden makes the estimated numbers: earnings and sales. That does not make the stock an automatic "buy" but rather makes it the object of further analysis as described above, ending with the type of considerations that you have put forward. Thus our "timing" is nothing more than a way of limiting the universe of stocks we shall analyze: simply an efficient way of utilizing limited analysis resources. We do not exhaust by any means the universe of profitably investable stocks.

    Therefore, stocks selected by other methods can give satisfactory results as well: there are many ways to be successful (and also to fail) in the stock market.
    Aug 9, 2012. 04:04 PM | Likes Like |Link to Comment
  • It's Time For Stock Picking [View article]
    Dear 4ran5par3n4,

    % of change of earnings, while a useful metric, measures a completely different phenomenon: how fast the earnings change? It is the velocity of change or, as mathematicians like to call it, it is "the first derivative". As such it would not be comparable at all with the vibration graph I am using to the right of the earnings graph as a trigger to my thoughts.

    The confusion is rather frequent in the financial media. For example, the rate of growth of GDP, a percentage measure, is frequently labeled as “the GDP” which is a dollar number.
    Aug 9, 2012. 03:51 PM | Likes Like |Link to Comment
  • Looking To Greece For Stock Market Wisdom [View article]
    Well worth adding a thought to this civilised exchange.

    Yes, a day of reckoning will come. But we do not know in what form and, more importantly when.

    Therefore, as practical people we should worry about what to do here and now, while keeping an eye on the potential for the reckoning.

    What this means, is supplementing the macro with bottom-up analysis (or is it the other way around?), to determine what to buy now. Is this "timing the market"?... Oh... horrible heresy!.. But yes, it is the way to go, simply because we do not seem to have reached the next pinnacle in our undampened, out-of-control economic sytem which oscillates with increasing amplitudes. Similarity to resonance phenomena in the natural world do come to mind.

    And I believe that US stocks, while not the only way, are a good way to go. But they need to be very carefully selected, mainly for the potential of creating disappointments which a market based on "hope" as we now have (as very cogently explained by Eric using undeniable millenial wisdom), will punish severely the slightest stumble. APPL is just one well known example.

    This "hope" stage comes after the "fear" that dominated the market's climb from 2009 on and will be inevitably followed by the "greed" stage. That's what we have to watch for as a signal for exit.

    Concerning Thucydides, this part of the quotation Eric uses is a bit too subtle for my simple mind:

    "...war takes away the easy supply of daily wants, and so proves a rough master that brings most men's characters to a level with their fortunes."

    How am I to read the word "fortunes"? Is it "material wealth" or "luck"? May be someone who can read the Greek original can clarify this confusion, most likely created by the translator.
    Jul 27, 2012. 10:50 AM | Likes Like |Link to Comment
  • Is It Time For Dividend Growth Investors To Be Buying Cyclicals? [View article]
    David and Paul,

    I appreciate kind words from anyone, as they tend to be rare. But from you too, they are particularly valuable to me. Will try to take time to write that article. Hopefully I will not get black-listed by who knows who.

    Jun 25, 2012. 05:39 PM | Likes Like |Link to Comment
  • Is It Time For Dividend Growth Investors To Be Buying Cyclicals? [View article]

    Accounting is no replacement to common sense. But sometimes it is a useful crutch for it. I am selling to institutional clients and understanding their lingo comes in hondy.

    My partner uses the deviation of actual sales and earnings from the consensus expectation in order to detect out-of-favor stocks for a reasonable contrarian portfolio. It is a method to "Analyze thre Analysts" both on the sell-side and buy-side. Like it or not, they do drive market prices to a large extent and it is their psychology that generally makes prices to be above or below their "real value" whatever that is.

    Accounting comes in for starting the DD for the stocks flagged by the above analysis. My partner tries to see in which market percentile that stock is for 3 variables (of the hundreds if not thoudsands available):

    - CFROI (Cash Flow Return on Investments) which helps understand whether the company is producing more or less cash on the money it invested than the average company (from a universe of about 2200 US traded stocks).
    - Asset Growth helps understand whether the company is growing or not. It is done on the same comparative rating with other companies.
    - Relative Value which tells him how the company is priced by the market as compared to the pricing of the average S&P500 company. This is done by looking at the (implicit) percentage at which the market discounts the expected cash flows for each company.

    All this gives a company "intrinsic value", much like Buffett does it ,and the company is bought if the intrinsic value is at least 30% above the actual market price. But not before checking for good-old fundamentals, much as you do it.

    There are of course a lot of selling criteria which are either risk based or depend on the company reaching its intrinsic value.

    It is a full time arduous exercise which gave a 12 years performance record described in my articles and compared there to Buffett's performance. Last year was not a great year for us either: we lost 2%. But on a rolling 3 year basis we have been better than the S&P500 starting in any month since September 2000 when this portfolio was first funded.

    We are now attempting to approach pension funds and foundations which however look for managers who already have at least billions under management. Such investors, while generally having sported a good track record at some time, are now more or less marketing companies and "rent seekers", i.e. living off the fat they accumulated.

    The pension systems of firms and municipalities are underfunded and they are trying to cover it up by assuming in their accounting (here is that blasted term again), by assuming returns on their assets of 7-8% annually. Good luck with the typical 40%-60% bond-stock allocation and avoidance of small, dynamic asset management firms.

    The explanation for not going to small firms is that it is "too risky" to allocate to a single manager more than 10% of that manger's assets. And since these pension funds are managing billions ($20-40 bil is not unusual), 10% of a small manager who has now $100-300 mil. is a "mere" $10-30 mil. Splitting up such a large pension fund into enough pieces to acommodate this, would be too much work. Similarly, analyzing each manager's approach for scalability, so as to be able to put more and even much more than 10% with one manager would be similarly too much work... not to mention the professionalism and responsibility required for such an analysis.

    Thus, pension funds end up bankrupting companies which pass on their pension obligations to the Government, i.e. to the tax payers or their municipal brethern are bankrupting tax payers more directly. Alternatively, the pensions promised to their employees go unpaid.

    That much for "leadership" by large organizations, be they public or private. The personal risk (of putting in more work and being blamed for creative management) for the managers employed by these large pension funds, who make salaries in the millions and tens of millions, comes ahead of the risk of employees and tax payers.

    So, right you are to manage your money yourself. But only few of our compatriots have the knowledge, interest and courage to do what you are doing. So the rest, especially those who do not have enough money to interest a Registered Investment Advisor, are delivered to the predation of a mutual fund industry which, besides the usual draw-backs of the mutual fund concept, suffers of the very same rent seeking syndrome as any large investment organization.

    Now, I hope you are Happy Dave that you got me to take all this time out to respond to your simple and reasonable few sentences. But may be this could constitute the subject for another SA article... What do you think?

    Jun 25, 2012. 11:10 AM | Likes Like |Link to Comment
  • Is It Time For Dividend Growth Investors To Be Buying Cyclicals? [View article]
    Your answer is pleasant... as always. You did pick up on my painter inference. Why am I not surprised? After all I have to take you at your word about being a "simple guy".
    Will send you a few words about CFROI but, as you say, why bother with accounting when you do not have to. In engineering school, the only course I almost failed was in accounting... only to become a financial analyst later in life. That's the way it works.

    Many thanks for the thorough and very serious response. I truly appreciate it.

    Jun 24, 2012. 12:57 PM | Likes Like |Link to Comment
  • Is It Time For Dividend Growth Investors To Be Buying Cyclicals? [View article]

    I agree with the guy who called you a Renaissance Man... Do you also paint?

    But I am writing to ask whether you have an opinion on ADR energy stocks paying high dividends like BP (5%+), TOT (6%+), LUKOY (7%), REPYY (10%), E (6%+).

    Was further wondering whether you care about CFROI (Cash FLaow Return on Investment) in your valued analysis and if so, where do you get the data from?

    All the best, Robert
    Jun 23, 2012. 10:15 PM | Likes Like |Link to Comment
  • With Intel (INTC) expecting another record year in 2012, the company will increase its quarterly dividend by 7% to 22.5 cents a share, starting with the payout that will be declared for Q3. CEO Paul Otellini says the company is experiencing "strong demand in our core business and significant progress in smartphones and other new growth areas." (PR)  [View news story]
    Aren't you worried about the cost of capital going up? INTC needs to add capital continuously and substantially, thus potentially poor return on invested capital?
    May 9, 2012. 09:21 AM | Likes Like |Link to Comment