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I am a 45 retired American lawyer living in Lisbon, Portugal. I came here to learn, to invest, to live an adventurous life with my family, and to develop a career as a painter. My investment process is (1) own rock solid businesses with healthy earnings and that pay me dividends, (2) spend less... More
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  • Reducing Portfolio Turnover

    (click to enlarge)I own two funds that have, quite frankly, turned out to be disastrous investments. Yes, in both cases, the funds have lost money since I bought them, but that is not why I consider them to be horrible. The main reasons why I have determined to largely exit these investments are (1) both funds have high management fees; (2) both funds have very high asset turnover; and (3) both funds have steadily cut dividends over the past few years.

    The first fund is REM, a mortgage REIT investment fund managed by Ishares. The fund invests in mortgage REITs, curious creatures that borrow $30 for every $1 of capital they own, in order to purchase pools of mortgages trading at a slightly higher yield than the fund's cost of borrowing. It's a great business when it works - a license to print money, frankly, unless interest rates do something the manager never anticipated (which is roughly something that happens all the time). The fund only holds 38 different positions, and yet, somehow manages an asset turnover of 42%. What is the manager doing? Since I cannot answer you, I see little justification for holding the fund much longer.

    The problem is that this fund yields 14%, and the income accounts for over 1% of our portfolio income. Selling it would involve a severe haircut - until now.

    The bright side of things is that as REM has cut dividends and dropped in price, OTHER stocks I follow have dropped in price while raising (or maintaining dividends), and now trade at yields that are comparable to REM. I will replace this fund with shares of TGH and NAP, both of which are in the shipping industry, and both of which are quite risky, but far less so than REM. TGH yields 12% today, and NAP is yielding close to 14%. NAP benefits from very long term charters for it's tankers, so the income and cost structure are locked in and the CEO, Angelika Frangou, is pretty much the best in the business. TGH has somewhat shorter term lease structures for it's shipping containers, but in a sickly industry, it's one of the best run outfits and is likely to survive until the industry turns around again. Both NAP and TGH borrow extensively - 75% debt to assets is high, but actually on the low side in the shipping industry. It certainly is less leverage than what you typically see in the MREIT business, where debt loads are routinely 1000s of times the capital value.

    The next fund on my chopping block is IDV, another Ishares fund focused on dividend growth. This fund claims to be passive but is anything but. Over half of the fund's assets are churned every year, and the dividend growth is negative. Fortunately, this fund only yields 4.7% now, thanks to a significant dividend cut earlier this year. Replacing it? Easy. I will be adding the following positions in roughly equal proportion:KMI, NHI, VTR, NNN, BUD, PEP, LMT, IBM, MMM, AMLP and EMR.

    Overall, the most important goals I hope to accomplish with my strategy are as follows:

    (1) I can harvest tax losses;

    (2) I can reduce my exposure (almost to zero) to high turnover, "passive funds" that are actually more like hedge funds in terms of how frequently they trade in and out of positions;

    (3) I can all but exit our exposure to the MREIT business;

    (4) I can reduce my exposure to funds that have a history of dividend cuts;

    (5) I can gain more exposure to companies and funds with stable dividend structures that should, if anything, lead to more dividend increases in the future; and

    (6) I can more equally diversify the percentage of portfolio income I earn from each of the 12 sources I will be boosting, moving closer to my ideal portfolio where I own 100 positions, each accounting for 1% of my portfolio income.

    The move will drop out income level by about $800 a year, which is relatively small compared to the $155,000 worth of IDV and REM that I will be selling. The move will completely wipe out all income growth I have had all month long, so compared to where we were at the start of the month, the only change I will see to our income is a change in the quality and sustainability of the income.

    But it is bitter medicine. I'm content to see our portfolio price drop 10%, 20%, or even harder. But watching our portfolio income drop by .01% is very unpleasing. I suppose I deserve a little pain, though, because without running into a brick wall once in a while, how else will we learn not to charge into brick walls in the first place?

    I'm facing the music. Investing in REM and IDV was a mistake. I invested in IDV because I felt the fund could do a better job than I could do of picking stocks that would increase dividends. It had a higher yield than most funds. It offered cheap and easy access to a well diversified pool of stocks I might not otherwise have any exposure to. Those were fine motivations, but I knew it had high turnover and I invested in it anyway. Wishful thinking, greed, or an unwillingness to admit a mistake and move on.

    With REM, I had owned shares in various individual MREITs, and wanted to harvest losses without changing the footprint of my investment. I would, for example, sell shares of AGNC to trigger short term losses, and then plow the proceeds into REM, keeping my income level constant and gaining diversification in the process. In retrospect, I should have stepped back and asked myself whether this was even a business I wanted to be in to begin with. The MREIT business model has almost fable like aspects of spinning straw into gold, which of course seems to good to be true. I forget that if something seems too good to be true, it is either not good, or not true, or possibly both. My desire to keep a high level of income blinded me from the simple truth that it's better to invest in a 3% yielding stock growing at 10%, than a 10% yielding stock shrinking by 3%. Put differently, I was so focused on income growth, I failed to make income quality the paramount goal, and that cost me.

    Sep 27 11:43 AM | Link | Comment!
  • The Cafe Brasiliero

    (click to enlarge)Coffee

    (click to enlarge)coffee

    (click to enlarge)


    The perfect way to begin the day. Lisbon is virtually closed until 10:00am. If you want a bite to eat or a cup of coffee before then, there is really only one option in my book: The Cafe Brasiliero. They open at some ghastly hour, I suspect. I tend to wake up while it is still dark, and this morning made it down to the Cafe by around 8:00am to find a hub of activity in an otherwise desolate street. The space is bright, smells powerfully of fresh espresso, and as you can see, the art work hanging on the walls is first class. The artists are all local Portuguese artists, and most of the paintings date to the 1950s and 1960s. Combined with the grand chandeliers and gold leaf, it's a magical place to spend 70 cents on delicious espresso.

    By the time I left, the accordian player in the hat showed up and was starting his daily repetoir of waltzes. There were already crowds starting to mill around, and Largo Chiado had officially woken up.

    This was a good dividend increases. Among the funds I own, SPY, SDY, VIG, DVY, VYM, SCHD have all raised distributions from this time last year. This week also delivered a 10% dividend increase by Lockheed Martin (Ticker LMT). As always, I have no idea whether my portfolio is up, down, sideways compared to last week, last month, even last year. Our annual portfolio income, however, climbed by just over $800 a year, compared to where it was at the start of this week - in no small measure thanks to my loyal and capable employees at Lockheed Martin who do an exception job delivering dividend raises on a regular basis. I'm not joking when I tell you that I plan to write Christmas cards to the CEOs of companies I own that do an especially good job raising distributions (certainly the case for LMT) or for just holding the ship together during rough waters (while Navios Maritime Partners stock has dropped by 60% over the past year, the dividend has remained solid and the CEO has indicated that should continue to be the case through 2016 as well as the rest of this year).

    Next Friday, many distributions will be coming through, and I plan to reinvest about $4,000 worth of savings across a few different firms and possibly a few ETFs. In my humble opinion, the areas of the market that appear most heavily loathed by pannic stricken investors are (1) anything having to do with commodities; and (2) anything tangentially related to China. Shipping companies like TGH hit on both of those cylindars, and at a yield of almost 12%, I'm happy to put about $1000 worth of new investment dollars into that.

    Emerson Electric is another (NYSE:EMR). The company has over 20 years of history raising dividends consistently, and yields about 4.3%. It will recieve a $1000 from us next Friday.

    BUD is expensive in my view, trading at a PE ratio of 19. It is always expensive, and I'm sick of waiting around for it to drop. Five years of waiting is long enough. I will buy $1,000 worth, pulling in a yield of 3.2%.

    Finally, IBM. At a PE ratio under 10, it's right in my happy place. It yields 3.6% and has a long, long, long track record of dividend increases. IBM is getting $1,000 from us.

    This allocation will bring in another $223 of dividends, and looking at the past histories of the companies, it is reasonable to guess that each year, that figure could rise over time. With these new investments combined with the dividend increases announced this month, I expect our total income growth this month will bring in another $1,100 per year to start - which I can either use to reinvest, or to offset any dividend cuts by companies experiencing poor industry conditions (particularly the shippers and MLPs we own that I'm worried might have no choice but to slash dividends due to industry conditions).

    Sep 27 4:43 AM | Link | 3 Comments
  • The Price Of One Instant Of Time

    The toughest thing about living as an expat is simply not understanding most of what is going on around you. You don't understand the rules for how to accomplish even the simplest of tasks, like paying a water bill. Oftentimes, you feel ignorant, helpless, and in a word, just plain stupid.

    Then there is the language. It is unfamiliar, the expressions people use range from non-intuitive to counter-intuitive. And the verbal differences are nothing compared to the underlying cultural differences that add patina and meaning to words you otherwise thought you understood. Here is an example. "I will call you tomorrow morning." You think you can translate that. You are fairly sure that it means "I will call you tomorrow morning." And you are wrong. To you, "tomorrow" means "in under 24 hours" but in your new culture, "tomorrow" could easily mean "next week" or even "so long, jackass." You mistook understanding a word for understanding a meaning, and without a sense of cultural familiarity, you're clueless.

    You often feel ignorant and just plain stupid.

    And here is precisely why living abroad as an expat is perfect training for an investor, and vice versa. Stock prices are very much akin to incoherent babble, and managing to exist with imperfect, flawed, or even non-existent information is the very ESSENCE of life as an investor. The only difference between investing and living in a strange country is the speed at which lessons in humility are delivered. Not the frequency of those lessons.

    I was reminded of this today while writing a comment to another excellent article here on SeekingAlpha. The article addressed the risk of buying shares of a certain business, given that the price of those shares could drop and that the investor could thereby lose some money.

    And I was perplexed by how this could possibly be. How does one lose money on an investment simply because the stock price has fallen? It was that all too familiar sensation of befuddled idiocy that I have come to know so well.

    So, I put my finger on precisely WHY I was so confused by the article. I did so using the following thought experiment which I will replay here for my readers.

    Suppose that I put $100 into a bank account, incorporated it, and sold you half of the stock in Bank Account Company for $40. Have you made or lost money?

    I think the answer is quite clearly that you have made money - $10 to be precise. The reason why is that you bought $50 worth of Bank Account for $40. It's open and shut as far as I am concerned.

    But now suppose that the price of your stock drops to $30. Have you made or lost money? In my view, the price of the stock is irrelevant - you made $10 the moment you bought it. If you are stupid enough to sell $50 worth of a bank account wrapped up in corporate stock wrapper for $30, then by all means, you just lost money. But nobody is stupid enough to do that, right?


    Wrong. Most investors don't invest in the business. They invest in the stock. What they paid for that hypothetical bank account isn't how they judge the value of what they bought. What the next buyer will pay them for their shares IS. Of course, in the real world, evaluating a business is a bit more complex than looking at the corporation's latest bank statement - and I'll get to that in a moment. The point I am trying to make is that there are two cultures: stock investors, and business owners. They use the same words, but don't speak the same language. It's just the same as how we Americans living abroad so easily mistake words like "tomorrow" for "tomorrow". In the investment business, phrases like "making money" are redolent with cultural import, to the point where they can even take on THE OPPOSITE MEANING depending on whether the person speaking them invests in stock, or invests in businesses.

    I suppose it's not so surprising that investors... most investors, I think... consider stock prices as the ultimate measure of whether they are making money or not. Stock prices are clear and unambiguous at any instant in time (it's only the movement of stock prices over any amount of time longer than an instant that prices become literally impossible to understand or predict). But at least there is that moment of clarity. Whereas, the value of a business is murky. The best you'll ever get is a rough estimate of what a company could be actually worth, and that number is guaranteed to change after you buy your shares. To say "I make money when the value of my business goes up" is to relegate your existence to that of the expat living abroad. It's perpetually unclear, impossible to make out what's really going on, and mostly you don't have a handle on where you actually stand.

    Living in perpetual ambiguity is not for everyone. Most of us need to know what tomorrow will bring, or at the very least, when tomorrow will come. At least a stock investor can fool themselves into thinking that they understand if and when they will make money - to a business owner, that's not an option.

    Or is it? This is where I get back to the question of business value being a murky proposition. It is, but with time, the murk matters less. If I buy a business that's worth maybe $100 or maybe $50 today, I could be off by a huge margin. But suppose that business grows by 10% a year on average. After 30 years, it does not MATTER how far off I was when I bought the business. The more time goes by, the less relevant that murky ambiguity is because, hey hey, I scored big time. I know where I stand - I just have to wait to get there.

    Whereas, with a stock investor, remember that at any given instant, the price of a stock is utterly without ambiguity, but as that stock price changes, it becomes less and less clear with time. The more volatile a stock price is, the less and less a stock investor knows where he stands over time. That instant of clarity is guaranteed to fade as the nanoseconds pass. And if there is only one thing any of us can be 100% certain of, pass those nanoseconds most certainly will.

    On the whole, I will take a blizzard of ambiguity today in exchange for one scintilla of rough certainty in the future. Even if that involves spending my days in a hazy intuition that I am clueless.

    Here is one example of how counter-intuitive words can be. "Brutal". It's certainly not how I would describe something good. But in Portuguese, it's EXACTLY how one would describe something they absolutely adore. I am working on a painting of a friend of mine with her grandmother. What I like is how my friend is looking at the viewer, but her grandmother's gaze is fixed off somewhere else, some dreamy place where she is just smiling and content. When they saw the painting, they exclaimed that it was "brutal!!!" and I would have prepared to run for my life if they weren't smiling. The life of ambiguity has many, many rewards.

    (click to enlarge)A Joana e Sue Avo

    Tags: SPY, DVY, SDY, VIG
    Sep 22 6:23 PM | Link | Comment!
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