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Tim McAleenan Jr.

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  • Does Your Dividend Portfolio Have Room For A Wild Child? [View article]
    Rich, thanks for the comment. If you'd be willing, I'm curious to hear your rationale for treating McDonalds as "opportunistic" rather than "core." It would seem to qualify for all-weather status because sales hold steady during recessions and the dollar menu sounds like a mighty fine place to feast in 2008/2009 economic times.

    On the other hand, the restaurant/fast food industry is highly susceptible to the capitalist forces of "creative destruction", and it has taken good (brilliant?) management plus brand equity to keep McDonalds on top for these past four decades.

    For the most part, I've been content to treat McDonalds as an all-weather stock given the appeal of cheap eating in bad times and an ability to raise prices in good times, and I haven't been bothered by McDonald's recent bout of slow growth because some European countries are approaching Great Depression economies, and thus, I view McDonald's flat performance there as a signal of strength rather than candidate for criticism.

    But I want opposing views on my holdings otherwise I cannot become as good as I'd like to be.

    That ramble was a long way of me trying to ask you: What about McDonalds causes you to categorize the company as "opportunistic" rather than "core", and do you agree that the strong commitment to Europe forgives stagnant growth, or am I driving down the road to rationalization?
    Nov 20 08:16 PM | 1 Like Like |Link to Comment
  • Blue-Chip Investing And The Back End Of Compounding [View article]
    I think Johnson & Johnson has a good chance of being the next Johnson & Johnson.
    Nov 8 02:39 PM | 10 Likes Like |Link to Comment
  • The Case For 0% Bond Allocation [View article]

    you asked: "When your EE bonds mature don't you have to pay the federal tax on them even if you don't cash them out?"

    Here's how it works. You get two choices with EE bonds:

    You could go the route of reporting the interest every year.

    Or you can opt out of reporting the interest until you file a federal income tax return when: you give up ownership of the bond to someone else, cash in the bond, or it stops earning interest because it has reached final maturity.

    Whichever of those three happens first counts as the triggering event.

    That's a long way of answering your question "yes."
    Nov 8 02:34 PM | 1 Like Like |Link to Comment
  • Blue-Chip Investing And The Back End Of Compounding [View article]
    It depends: What do you value more, a high probability of having a baseline threshold of funds available for retirement, or the opportunity to "make it big" with the understanding that you might be increasing your chances of wipeout loss by 30-75%, depending on your selections?

    If seeing a couple businesses go bankrupt would bother the hell out of you (as opposed to mildly irritate), then it's intelligent to stick with Exxon, Coke, Colgate-Palmolive, Johnson & Johnson, and so on.

    If you want to see big leaps in your wealth, and you accept the terms of increasing the chances of seeing a couple positions burn out, then pursuing growth might be advisable.

    Although, I'll let you in on the secret known by people that manage trust funds and so on: Look at the 25 year histories of Coca-Cola, Exxon Mobil, Procter & Gamble, Johnson & Johnson, and the rest of the gang. These blue chips have a way of making people much richer over long passages of time, even though they come with less risk. That may seem like a paradox, but it's not. When you keep generating more and more profits and folding them upon themselves in the form of dividend growth and dividend reinvestment, the compounding starts to get crazy once you are twenty years into it.
    Nov 7 07:46 PM | 7 Likes Like |Link to Comment
  • Blue-Chip Investing And The Back End Of Compounding [View article]
    Good question. I've written about the advantages of each approach, but the best way to answer is probably to just say what I do and why:

    For any company I invest in, the general rule is to pool the dividends together and make the most intelligent value investment that presents itself with those funds. However, there are twelve companies on this earth, a few of which I currently own, in which the earnings quality is so great that I automatically reinvest.

    Johnson & Johnson is one of those 12 companies. I currently own some shares, and I automatically reinvest. The logic is that when I invest, I want to avoid putting money into something over time that eventually goes bankrupt. I can't find any publicly traded companies with a more remote bankruptcy risk than Johnson & Johnson. It's on that pedestal with Procter & Gamble, Coca-Cola, PepsiCo, Colgate-Palmolive, Nestle, ExxonMobil, and five others where the company has a good chance of existing decades from now, gushing out profits.

    With those companies, the idea is to own "more, more, more." In disaster scenarios, those companies would be the last dominos to fall, and that is why I want to build up a sizable position in them.

    You know the quip about how no one on his deathbed wishes he spent more time clocking hours at a nine to five job in the cubicle?

    Well, my application of that logic to investing is this: Over the course of an investing life, no one says--Damn, I wish I didn't keep using those cash dividends to buy more blocks of ExxonMobil stock.

    In a nutshell, here's what I do: The general presumption is to pool cash together so I can use that cash to make the most intelligent decision I can. However, I do automatically reinvest into the truly best companies, because I want to acquire more shares of them throughout my life, and the earnings quality is so high that it is not worth sweating 5% or 10% price premiums. With that said, I will apply a common sense rule and cease automatically reinvesting if the overvaluation becomes excessive (perhaps 33% or more) because once you reach extreme levels, my concern for valuation becomes more important than my hat tip to earnings quality.
    Nov 7 02:50 PM | 6 Likes Like |Link to Comment
  • The Case For A 0% Bond Allocation Is Weak [View article]
    A couple things:

    In my article, I mentioned three times that I was referring to Treasury bonds exclusively (as opposed to special corporate issues, internationally issued government bonds, etc.).

    Since you read my article enough to write a rebuttal to it, I would think that you would recognize that the content argued the case for 0% Treasury bonds--it seems you are responding to my article's title rather than the content of my article. Okay, maybe the title should have been different for the article, but that has little bearing on our improvement as investors.

    To respond directly to your argument:

    (1) Why isn't it fair to compare Treasury bonds to individual securities? The options that we as investors get to choose from are limitless, and of course we compare our contemplated actions against the alternatives. Since I invest in individual stocks, why should I be forced to compare myself to a collection of 500 companies that the S&P 500 thinks is important? I'd rather make investment decisions based on what I find important.

    (2) As for calling my prediction "prophetic." It's not prophecy, it's probability. When you own companies that have been gushing out profits for decades and retain profits for growth in earnings and dividends, it becomes reasonable to infer that a carefully selected collection of such companies will beat static 2.65% and 3.69% yields. This is especially true when you own a security with a higher starting yield and a high probability of a growing dividend.

    (3) If you think that we are going to experience a sustained period of deflation or very low inflation, then bond investing becomes more reasonable. However, that still does not make it better than blue-chip stock investing: it has to do with the retained profits that fuel potential growth--bonds do not possess a growth attribute like what you see with profitable companies that pay a dividend and retain earnings for growth. All you can do is reinvest, and that is applicable to stock investing as well.

    While I can respect the decision of others to hold some bonds (that's their prerogative), I'm not sure that it is necessary for you to disrespect my argument by saying that it is "weak" to hold a portfolio of stocks entirely.

    If an entire allocation to publicly traded businesses fits my risk tolerance (*I actually desire a significant stock market crash so I can buy more assets at a cheaper price*), falls within my sphere of competence, and has a reasonable chance of giving me the 7-8% growth I desire to meet my objectives, then who are you to tell me that I am "weak" and making "anything but rock-solid argument[s]" if a 100% stock strategy gets me to where I desire to go?
    Nov 7 11:04 AM | 9 Likes Like |Link to Comment
  • Stock-Market Limerence Will Cause Portfolio Heartbreak [View article]
    Thank you so much.
    Nov 5 08:42 PM | Likes Like |Link to Comment
  • The Case For 0% Bond Allocation [View article]

    I'm really sorry to hear about your relative.

    There, but for the grace of God.

    Nov 5 02:31 AM | 1 Like Like |Link to Comment
  • The Case For 0% Bond Allocation [View article] Set the year to 1983 and punch in JNJ.

    "What is the probability that you would have included one of them if you'd bought ten stocks in 1983?"

    Very high. Most likely I would have gotten at least 8 out of 10 right. Conglomerates, companies with brand equity, and companies with diversified revenue streams have a very low historical tendency to go bankrupt, and those constitute most of the companies I own.

    Banks (Wachovia), tech companies (Research in Motion), companies with high fixed costs (General Motors) and those susceptible to technological change (Eastman Kodak) are the reasons why buy-and-hold investing gets a bad rap. If you avoid those, or at least recognize that they require constant diligence, you will put together a very nice stock-picking career for yourself.

    If I didn't feel that way, I wouldn't invest in stocks. I'd take up the study of real estate investing or something. Either way, I don't think 2.65% bonds in a world of 3.5-4% inflation is going to increase my purchasing power, which is why I ultimately invest in the first place.
    Nov 4 02:03 PM | 9 Likes Like |Link to Comment
  • Stock-Market Limerence Will Cause Portfolio Heartbreak [View article]
    I wouldn't avoid Anheuser Busch either.

    Rather, with most blue-chip sounding companies, intelligent investors are willing to pay a reasonable price or even a premium.

    With Anheuser Busch or Clorox, I would buy only once it traded at a discount to intrinsic value and became undervalued.

    The earnings quality would rope me in, but the debt load would make me insist upon a discount.
    Nov 4 01:48 PM | 4 Likes Like |Link to Comment
  • The Case For 0% Bond Allocation [View article]
    "The point of holding bonds is to ensure that if you are retired, or close to it, that you never have to sell stocks in a market decline."

    My response is that you shouldn't own any stocks unless you plan on keeping the investment in the market for at least 5 years. Or, in the alternative, you can do it if you're okay with accepting the consequences of that decision. If your investment falls from $22,000 to $16,000 and you have to sell, you don't get struck by lightning or fall of a cliff. It just sucks a little bit you had to take a loss--but if you can accept that risk, go ahead and rock it out. Otherwise, follow Step #1 and don't use money you need to buy things that change in price every day.

    If you need the money soon, the prudent thing is to hold cash and cash equivalents. If that means short-term bonds are part of an emergency fund, there's nothing wrong with that. I prefer stocks, cash, and nothing else (maybe real estate someday), but as the opportunities and terms change, I'm open to changing my preferences.
    Nov 4 01:20 PM | 4 Likes Like |Link to Comment
  • The Case For 0% Bond Allocation [View article]
    "But did the stockholders (if there even were any) do any better in a Communist revolution?"

    Depends. If they owned international stocks on international exchanges, they were fine in that they retained their ownership. For instance, the Nestle IPO was quite popular with Soviet investors. But if a company had Soviet headquarters, and traded on the Soviet Exchange, then the stock certificates got cancelled and consumed by the revolutionaries.

    After the revolution, you could have gotten killed if you got caught trading stock on the birzba after the Moscow shutdown in 1917. But then again, lots of things could have gotten you killed in the Soviet Union...

    Even if you conclude that the United States situation is not usefully analogous, the question becomes: How much weight do you attach to the guarantee of legal obligation?

    If I had to hold 30 year Treasuries until 2043, I'd be pissed because I would be poorer in 2043 than 2013 because of inflation and taxation on the investment.

    But if I could hold a basket of Procter & Gamble, Johnson & Johnson, Coca-Cola, Colgate-Palmolive, ExxonMobil, Chevron, General Mills, PepsiCo, Nestle, and a few others, I would be happy because the dividend growth in aggregate would wipe out the consequences of a bankruptcy or two along the way, and would make me much richer in 2043.

    In nominal dollars, a $10,000 Treasury bought today will have a value of $30,200 in 2043 (plus you'd have to subtract taxes and so on).

    But imagine you chose ten high-quality dividend stocks to make a $1,000 investment into each. Imagine that nine of those high-quality companies go bankrupt. And then imagine that Johnson & Johnson was the tenth company. That $1,000 in Johnson & Johnson would compound into $63,517, if the past 30 years are any indication. That's assuming a 90% stock-picking failure rate, which is catastrophic.

    With stocks, you could fail your way to success just by holding one stock out of ten that performed as expected (with failure everywhere else), and still roughly double what a thirty-year Treasury investor would experience.
    Nov 4 12:51 PM | 17 Likes Like |Link to Comment
  • The Case For 0% Bond Allocation [View article]
    +1 Dave.
    Nov 4 11:49 AM | 3 Likes Like |Link to Comment
  • Stock-Market Limerence Will Cause Portfolio Heartbreak [View article]
    I own both GE and Microsoft, so I definitely don't "dismiss two of America's greatest success stories." However, I would dismiss both of them if they started trading at over 40x normalized earnings, and that's why I pointed out that overvaluation can turn a company into a bad investment.

    Any company can become a bad investment at a certain price, and that's what I sought to show through those illustrations.
    Nov 4 10:35 AM | 9 Likes Like |Link to Comment
  • The Case For 0% Bond Allocation [View article]
    "There is a big difference between a stream of payments you have a legal claim to and a stream of payments that may be reduced or suspended at any time, for any reason. A legal claim is not guaranteed but it's a lot more secure than a stream of payments that only continues for as long as the company feels like it."

    I don't necessarily think of bonds as better than dividends simply because of the "legal claim issue." I would put the strength of a basket of stocks that has been paying dividends for 50+ years (Exxon, General Mills, Colgate-Palmolive, etc.) against a government because the growth in dividends from most of those stocks would more than compensate for any potential "burnouts" along the way.

    Plus, just because something is backed by a legal claim does not necessarily correspond to safety.

    For instance, imagine owning czarist-era bonds in Russia in 1917 which got cancelled out when the Bolsheviks came to power. You would have been dead before seeing any of that principal back. See here:

    And I cannot really comment on what someone writing about dividends twenty years ago would say...
    Nov 4 10:20 AM | 3 Likes Like |Link to Comment