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Brian Mundy
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Quantitative Consultant for Fortune 500 companies. Academic background in quantitative analysis and finance. Creator of far too many to count black-scholes options valuation models as well as various market timing instruments. The best real solutions found seem to be mean-variance models... More
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  • A Real Portfolio For The Next 12 Months 2 comments
    Jul 27, 2012 2:38 PM | about stocks: LNKD, NFLX, TOT, MSFT, TLT, PHG, VZ, EXC

    I'll admit that some of the advice I have seen here is spot on, but often... it's scary - I'm looking at you fans of LNKD. I've done pretty well - I called the NFLX meltdown as well as the boon in long-term treasuries. I beat the market and I'm right enough that people ask my advice, which is about all anyone can hope for.

    To that end, I'm often asked to construct portfolios that are useful in the short to intermediate term. I have no interest in betting on quarterly returns - the people that ask me for help are buy-and-hold kinds of folks, so I make sure I give buy-and-hold advice. I use mean-variance models based on 52 weeks of returns.

    Methodology: I'll take 8 stocks / ETFs and insert them into the model, whatever distribution provides the greatest return with the lowest level of incremental increase of portfolio risk are selected.

    Assumptions: I won't short stocks, and I try to stay away from inversely correlated ETFs (such as TZA or SDS). Basically, I'm just going to assume that we are, as a population, incentivized to increase stock valuations.

    Anyhow, here is the best of what's around:

    Stock Name Sector Dist Ave Wk Rtn
    TOT TOTAL FR OIL & GAS 5% -0.39%
    VZ VERIZON COMMS 20% 0.34%
    TLT 20 YR TREAS GOV BOND 30% 0.61%

    I'll go into each, just so that you can see my rationale for their selection:

    1) TOT: French Oil and Gas - it's got a high dividend yield and has been uniformly crushed over the past year like all of the rest of Europe (perhaps for good reason - they're not operating in a vacuum). But I like the upside, and I love the dividend

    2) MSFT: I'm a long-time fan of Microsoft... Which has made it so difficult to watch the stock stagnate between 23 and 30 for so long. Now that it's broken 30, I can see it rising. They're the biggest brand in technology... and they're coming out with a new version of Office which is their biggest revenue generator. A risk, sure, but if it doesn't work out we'll all just keep using Office 2010 until they fix the problem. Anyway, I'm buying anywhere below 31

    3) EXC: Seems to be the best of the Utilities plays right now. A great dividend, a current ratio that's sinking year over year... I'll take it.

    4) VZ: Verizon - A funny thing happened in my area (just outside of DC, nations capital and all - not exactly in a rural area here people), Verizon isn't laying any new wire. Wire is old, wireless is new. These guys go both ways. Don't get me wrong, I can't stand their customer service, but their ratings are glowing compared to the rest of the sector (we'll call it a low bar - a low, low bar). They're the best of what's available and somebody's gotta get me to "the cloud".

    5) TLT: Long term treasury bond etf - I know what you're thinking right - it's played. The government buyback has to end sometime... fine. But here's the deal - we just surpassed the $10 trillion level in terms of money supply. It's cyclical, I know... but the fact remains that it has increased faster than the rate of core inflation, and the velocity to get to this point was twice as fast as it took us to get from 8-9 Trillion.

    That said TLT, you're ugly, but you are much prettier than your uppity European cousins. The bond rally isn't going to be over for a while... might as well get comfortable. And furthermore, keep in mind this is a contrarian play on much of the rest of the portfolio.

    6) Others: Additional selections I liked for the portfolio were Royal Philips (PHG) - they've been around for a while and they got slammed on the fact they were getting out of that "lucrative" TV business and shrinking accordingly (plus this whole Europe incident). They're a good company - been around for a long time, getting leaner and meaner to focus on healthcare. Ultimately they had too great a correlation to other stocks in the portfolio to justify their return... too bad.

    Feel free to contradict me - prove me wrong, or suggest better stocks with a brighter future. I'm always happy to listen and re-run the analysis with other selections.

    Disclosure: I am long TLT, MSFT.

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Comments (2)
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  • Gnight
    , contributor
    Comment (1) | Send Message
    I like your approach, and it seems simple enough, but I keep hearing how overvalued bond prices are relative to their yield. Care to comment on why TLT keeps going up and up?
    27 Jul 2012, 03:56 PM Reply Like
  • Brian Mundy
    , contributor
    Comments (22) | Send Message
    Author’s reply » I wouldn't look much past the involvement of the Fed and the fact we continue to benefit from the scared money in Europe... you just need to keep in mind the TLT is being used as a hedge against the exposure you're carrying in the rest of the portfolio.
    27 Jul 2012, 04:06 PM Reply Like
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