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  • How Much Kinder Morgan Is Too Much For A Dividend Growth Investor? [View article]

    If you decide to trim and invest elsewhere you might consider looking into ARLP.

    The price of this company has been beaten down to the point of absurdity: P/E < 6, Payout Ratio < 60%, Yield > 11% and they have had over 20 consecutive quarters of increasing their dividend. Their debt is also very reasonable for the capital intensive coal industry.

    Analysts covering ARLP give it 2 strong buys, 3 buys, and 2 holds.

    If you split your KMI sale money and were to put some into ARLP the "excess" yield there would allow you to put the remaining money into lower yielding DG stocks while still matching the KMI income you lost. (1/3 at 11% and 2/3 at 3% gives 5.6%-ish total income)

    The company reports Q2 2015 this morning. Maybe you'll like it enough to dip a toe...
    Jul 28, 2015. 07:55 AM | 2 Likes Like |Link to Comment
  • Why I'm Calling The Federal Reserve's Bluff [View article]

    1) Puerto Rican Bond fund facing lawsuits and arbitration demands over losses exceeding $600 Million:

    2) Congress is considering a bill to allow Puerto Rico to file for bankruptcy and "adjust" their debts:

    Yep. Our government bonds are safe. Trust us.
    Jul 25, 2015. 09:13 AM | Likes Like |Link to Comment
  • The End Is Near For Puerto Rico Bond Investors [View article]
    Nice piece of self promotion.
    Jul 25, 2015. 09:03 AM | Likes Like |Link to Comment
  • DVK Portfolio Comparison To SPY, Using Sharpe Ratio [View instapost]
    I put a more detailed response in a comment on DVK's recent article:

    But the end result is that changing the 10/31 portfolio value to something $5K to $7K lower actually improves DVK's Sharpe Ratio by lowering his volatility:

    New Value
    for _________ New
    10/31 ______ Sharpe Ratio

    $39,000 ____ 0.4543
    $38,000 ____ 0.4481
    $37,000 ____ 0.4387

    Thanks for uncovering the longrundata issue. I don't think a small change in one month's returns will cause much change in the SPY Sharpe Ratio, though it would lower the Annual CAGR value a tiny bit.

    I still believe my results are indicative of "the truth", even if not 100% correct. The data suggest DVK's reward to risk is about 10% to 15% better than SPY over the seven year period.
    Jul 21, 2015. 11:21 PM | 1 Like Like |Link to Comment
  • The Real Difference Between Total Return Investing And DGI [View article]
    The engineer gene in me appreciates the approach. Despite the use of different metrics, both DGI and TR approaches are based on a company's ability to continue growing.

    Instead of "Tastes Great" vs. "Less Filling" we have

    "Pays Great" vs. "Keeps Compounding".

    So long as both remain true wealth grows over time.
    Jul 21, 2015. 11:07 PM | 8 Likes Like |Link to Comment
  • Periodic Table Of Dividend Champions - Which Champions Have The Best Combinations Of Yield And DGR? [View article]
    "the correct balance of your DVK portfolio on 10/31/08. Smarty claims he copied your data correctly but I think there is a clerical error (same total as 8/31/08.)" - FinancialDave

    I double-checked the document DVK sent me and the values are the same for both months. I don't know how DVK maintains his document so I can't comment on how it got that way.

    In addition, I don't see why the exact value matters so much. The Sharpe Ratio I calculated is based on the standard deviation of the monthly returns. If you change one month's value, the return for that month and the following month both change. In this case, it has almost a "don't care" impact on the Sharpe Ratio.

    DVK's portfolio value for 10/31 is noted as $44,836. On 11/30 the portfolio value was $36,464, a drop of over 18.6%. Changing the value on 10/31 to something "worse" causes the data on 11/30 to improve significantly, which offsets much of the negative impact of the change on 10/31.

    I went back and recalculated the Sharpe Ratio for a few different possible portfolio values on 10/31 and got the following changes in the Sharpe Ratio:

    October 31
    Value _______ Sharpe Ratio
    $44,836 ____ 0.4299 (the original Sharpe Ratio I calculated)
    $44,000 ____ 0.4383
    $43,000 ____ 0.4467
    $42,000 ____ 0.4529
    $41,000 ____ 0.4565
    $40,000 ____ 0.4571
    $39,000 ____ 0.4543
    $38,000 ____ 0.4481
    $37,000 ____ 0.4387
    $36,464 ____ 0.4324 (the portfolio value on 11/30)
    $36,000 ____ 0.4263

    So as you can see, changing that one month's portfolio value has almost no impact on the final Sharpe Ratio. In fact, most of those different values cause DVK's Sharpe Ratio to improve.

    So even if DVK transcribed something improperly that one month, his Sharpe Ratio is still better than SPY's was. The validity of the exercise remains unless you're just going to claim that DVK's values were ALL wrong and that seems a bit overboard as an argument against the original result.

    At some point you just have to accept the data and the results it presents.
    Jul 21, 2015. 10:58 PM | 5 Likes Like |Link to Comment
  • Is HCP The REIT Buy Of The Year? [View article]
    To see a real US Battleship look here:

    If you haven't ever seen a battleship up close and in person, and you get an opportunity to pay a visit, I'd highly recommend the trip. They're pretty impressive.

    USS Alabama, Mobile, AL
    USS Iowa, San Pedro, CA
    USS Massachusetts, Fall River, MA
    USS Missouri, Honolulu, HI
    USS New Jersey, Camden, NJ
    USS North Carolina, Wilmington, N.C.
    USS Texas, LaPorte, TX
    USS Wisconsin, Norfolk, VA
    Jul 19, 2015. 10:28 AM | 3 Likes Like |Link to Comment
  • Measuring The Success Of Your Dividend Portfolio [View article]
    "and that metric (the last 3 years based on current portfolio makeup) gives the SPY a 65% advantage in risk adjusted returns. To me anyway that seems pale in comparison to a metric that gives the DVK portfolio a 10% advantage over 7 years on a portfolio the is unrecognizable to the original." - FinancialDave

    Sounds like a Recency Bias to me.

    "The Party Effect or Recency Bias is where stock market participants evaluate their portfolio performance based on recent results or on their perspective of recent results and make incorrect conclusions that ultimately lead to incorrect decisions about how the stock market behaves." - Wikinvest

    The way I would interpret the meaning of a measurement based on the most recent three years of data would be that SPY outperforms during bull markets. However, SPY's performance during a down market and the years immediately afterward was equally as disappointing when compared to DVK's portfolio. Don't you think that's an important fact for an investor to know too?

    Since the typical investor will experience all kinds of market conditions, then it seems to me that performance over all types of markets, in total, would be a more complete measure of reward to risk for any method.

    As for turnover, I (still) don't get it. What difference does turnover make? Someone who day trades e-mini contracts might have turnover in the hundreds of percent, yet the Sharpe Ratio can still be used to compare reward/risk to DVK or SPY.

    DVK's written DGI methodology has allowed him to sell some stocks and buy others, from Day One. It's part of his DGI method.

    If market conditions present him with a chance to sell an overvalued, low yielding stock for an undervalued higher yielding stock with similar dividend growth characteristics, why wouldn't he do so if his 'rules' allow it? Why can't he trim some stocks to add another and improve his portfolio's diversification, or reduce the concentration in one stock?

    Those changes don't invalidate the reward/risk ratio measurement, it simply means that those changes are a part of his written DGI methodology which the reward/risk ratio is measuring, just like it measures the performance of the S&P 500 index (with a ~20%, seven year turnover), which is based on written rules (implemented by a committee of some sort).

    Extending your prior comment, do you feel that the Sharpe Ratio is evaluating the S&P 500 committee's "fund managing" ability, as you stated it is evaluating DVK's fund managing ability? I imagine the committee membership changes over time, but the rules that drive their decisions probably change much more slowly. It's the rules that determine what companies are dropped or added, not the committee members, just as it is DVK's rules that determine what stocks he selects to hold or sell.

    If you don't feel that having information about both good and bad times is a better way to evaluate your investment approach, then by all means, Party On. Ignore the four years where SPY lagged significantly. Me, I'd rather make my evaluation after seeing both sets of data.
    Jul 17, 2015. 03:25 PM | 4 Likes Like |Link to Comment
  • DVK Portfolio Comparison To SPY, Using Sharpe Ratio [View instapost]
    "10/31/08 $44,836.00

    this total looks out of place and is further suspicious because it is exactly the same total as 8/31/08." - FinancialDave

    I got those numbers from DVK. I transferred all of them to a spreadsheet using a single cut and paste from his data so I don't think I could have "entered" the numbers improperly.

    You'll have to ask DVK to verify them. I'll see if I still have the original data set somewhere and double check when I get the chance.
    Jul 17, 2015. 02:49 PM | Likes Like |Link to Comment
  • DVK Portfolio Comparison To SPY, Using Sharpe Ratio [View instapost]
    ""... in a recent book by Lowell Miller, where he notes that some people point out that "you can't eat risk adjusted returns." Which of course is very true and one of the reasons why I like to report REAL results." - FinancialDave

    "Tell that to the SPY holder at the end of December 2011 when his holdings were valued 18.25% lower than DVK's portfolio." - me

    I might add that roughly 300,000 Baby Boomers retired that month and may have had to convert their TR portfolio to an income portfolio at a inoportune time in order to generate the cash stream needed to fund their living expenses.

    One aspect of DVK's portfolio I didn't note here is the much higher level of income it generated (with the same TR as SPY) and the fact that he didn't have to do anything like restructure it.
    Jul 16, 2015. 10:11 PM | 1 Like Like |Link to Comment
  • Measuring The Success Of Your Dividend Portfolio [View article]
    "It seems like the Sharpe ratio is based on a similar principle. In fact, the point is to provide a common measurement across many types of investments no matter what they are or how they are managed. If they have a varying total value, the Sharpe ratio can be calculated." - DVK

    That is my understanding based on the definitions I have found online. It provides a common measure of reward/risk based only on a periodic series of valuations. The methodology behind generating the values only indirectly impacts the Sharpe Ratio (via generating the changes in value over time).

    It is a simple and generalized means of comparing the efficiency of differing investing methods. In fact two DGI portfolios might have quite different Sharpe Ratios due to differences in implementation. For example, one portfolio might shun the holding of financials while the other portfolio doesn't. In the long run that might make a difference in their Sharpe Ratios.

    Only the data knows.
    Jul 16, 2015. 09:22 PM | 3 Likes Like |Link to Comment
  • Measuring The Success Of Your Dividend Portfolio [View article]
    "I am confused - in sentence #1 you only need to know the values -- then why are you worried about who left the S&P 500?" - FinancialDave

    That was a rhetorical question to you. I am pretty certain that you calculated the three year SPY Sharpe Ratio without any concern for the changes in the underlying index and the stocks which changed in SPY. You likely just used SPY pricing to calculate the Sharpe Ratio.

    You claim above that DVK's Sharpe Ratio, as you estimated it, would be skewed due to the changes he made. Yet, wouldn't you consider changes to the SPY index/ETF to also skew those estimates? Let's make sure we're comparing apples to apples.

    All you need to calculate a Sharpe Ratio is month end portfolio values over some sufficiently long period (I would expect at least two years at a minimum.)

    Any variations in portfolio management is reflected in the valuations. DVK manages his portfolio by following his Constitution. That methodology, as applied by DVK, is what the Sharpe Ratio is evaluating.

    While others may make slightly different choices for stocks to buy, the DVK Sharpe Ratio should be 'representative' for their reward/risk as well, over longer time periods, if they also follow DVK's Constitution (or something very similar).
    Jul 16, 2015. 03:43 PM | 4 Likes Like |Link to Comment
  • DVK Portfolio Comparison To SPY, Using Sharpe Ratio [View instapost]
    "The work you have done is actually quite valuable, because by comparing the 3 year Sharpe ratio that I reported, which shows about a 65% higher Sharpe ratio for the S&P benchmark, it becomes apparent that almost 100% of that improvement is due to the "active management" of DVK and not the actual investments themselves." - FinancialDave

    First of all, thank you for the complement. I appreciate it. We all learn whenever anyone puts a little effort into evaluating something and sharing the results.

    I disagree about evaluating DVK's active management however. The three year comparison simply shows the risk adjusted returns over that particular period. DVK also 'managed' the portfolio over the prior four years when it had a much better performance than SPY.

    Based on the numbers in the table above, I get the following:

    6/1/12 to 5/31/15 (Ending 3 year period)
    DVK CAGR: ____ 12.88% ______ SPY CAGR: ___ 19.53%
    DVK A_STDEV: __ 9.22% ______ SPY A_STDEV: _ 8.46%
    DVK SR: ________ 1.40 _______ SPY SR: _______ 2.31

    Yet for the prior 4 year period we get a different result:

    6/1/2008 to 5/31/2012
    DVK CAGR: _____ 4.73% ______ SPY CAGR: ____ 0.79%
    DVK A_STDEV: __ 5.55% ______ SPY A_STDEV: _ 6.24%
    DVK SR: ________ 0.25 _______ SPY SR: _______ 0.04

    During the first four years DVK's Sharpe Ratio was a factor of 6.0 better than SPY.

    During the past three years SPY's Sharpe Ratio was better by a factor of 1.65.

    So while your statement that SPY had a better Sharpe Ratio during the last three years is true, it is also true that SPY's performance was rather poor during the prior four years. Which is 'most representative'?

    Dicing up the time interval into smaller parts only reduces the statistical confidence in the result(s). Statistical theory will tell you that larger sample sizes narrow the confidence interval for any conclusion.

    In other words, the results from a seven year set of data is more likely to be closer to the 'true' value than results obtained from a three year subset of the same data. Which subset is "more true"? The first four years or the last 3?

    "... in a recent book by Lowell Miller, where he notes that some people point out that "you can't eat risk adjusted returns." Which of course is very true and one of the reasons why I like to report REAL results." - FinancialDave

    Tell that to the SPY holder at the end of December 2011 when his holdings were valued 18.25% lower than DVK's portfolio.

    DVK: $56,128.00 ___ SPY: $45,879.00

    Now certainly, you can't go backward in time to change anything, and SPY did manage to catch up during the roaring bull market that followed, but the message I believe the Sharpe Ratio is intended to convey is that DVK's portfolio is less likely to have such large drawdowns to achieve the same gains. (Fortunately the gains at the end of the data set are nearly equal, so the Sharpe Ratio differences wind up being almost entire due to variability in the returns - aka the risks taken.)

    "My interest is more in the risk/reward of the investments chosen and not in hiring DVK as my investment manager" - FinancialDave

    And most DGI'ers interest is in evaluating the methodology DVK used, not the vehicles he chose to implement that methodology.

    DGI'ers believe that buying quality dividend growing stocks AT A VALUE PRICE will boost the Sharpe Ratio. I'm still trying to figure out how a practitioner of MPT/TR figures out which ETF's are available at a 'value price' and takes advantage of that opportunity. It seems to me that they generally just pick a date and invest or rebalance regardless of valuation.

    Did you choose your three ETF's because they were undervalued at the time? Whatever method you used to select them, that is the methodology that the Sharpe Ratio is scoring, not the fund manager, and not the ETF or funds used. The method by which they were selected and acquired is what drives the performance to follow as DGI principles drive the DG stocks purchased and their performance, and as the selection criteria (and weighting) for the S&P500 index drives SPY's performance.
    Jul 16, 2015. 03:23 PM | 1 Like Like |Link to Comment
  • DVK Portfolio Comparison To SPY, Using Sharpe Ratio [View instapost]
    "Does turnover rate have any direct link to the risk-adjusted returns and the Sharpe ratio that Smarty calculated?" - DVK

    Not that I can find. The words "turn over" and "turnover" do not appear once in the Wikipedia entries for 'Modern Portfolio Theory' or 'Sharpe Ratio'.

    It would seem to me that since the Sharpe Ratio is a statistical measure of performance (it uses standard deviation) that the method for generating the results is inconsequential to the comparison. All you need are the results of the methodologies in question.

    The nice aspect of using a Sharpe Ratio is that you can compare the risk adjusted performance of day traders to that of index DRIP'ers and get a meaningful comparison. The end result for both cases is a measure of how much you gained vs. how much the portfolio value changed over time.

    The theory being that it is preferable to gain 0.5% every month (minimal variance) than it is to gain 6.17% in a year where the monthly variance is +/- 3%. Same gain, different risk profile.

    How you get the gains is of no consequence to the measure, it is more appropriately a question of personal preference. Some people would rather plop their money into ETFs, DRIP, and go to the beach, while others would prefer to make dozens of scalping trades each day by following the market in real time (with turnover in the 100's of percent each month).

    Application of the Sharpe Ratio indicates who is generating better financial "performance", but says nothing about any other aspect of the methodology. If anyone wishes to assert otherwise I'd sure appreciate a link to any webpage that makes and/or defends that particular claim as being considered inherent in the use of the Sharpe Ratio.

    That's the way I see it. Of course opinions can vary widely, and often do.
    Jul 16, 2015. 12:30 PM | 1 Like Like |Link to Comment
  • DVK Portfolio Comparison To SPY, Using Sharpe Ratio [View instapost]
    "Just remember that the DVK portfolio has had close to 65% turnover of stocks in those 7 years, (about 2-3 times the S&P 500) so I question the validity of a 7 year Sharpe ratio." - FinancialDave

    Then why did you compare 5 and10 year Sharpe Ratios when reviewing your three fund approach?

    "Below is a risk analysis between the portfolio and the benchmark. Two of the standard risk measures are the standard deviation (SD) and the Sharp ratio. The 3 year, 5 year, and 10 year SD for the Portfolio is 8.89, 12.83, and 14.54, respectively, and 9.08, 13.14, and 14.72, respectively, for the benchmark, which shows a less volatile portfolio as compared to the S&P 500 in all three time frames. The Sharp ratio is a risk-adjusted measure developed by Nobel Laureate William Sharpe. The higher the Sharp ratio the better the risk adjusted performance. As you can see below the portfolio outperforms the benchmark on a risk-adjusted basis, even if ever so slightly, in all three time periods measured."

    If a 10 year Sharpe Ratio is important enough for comparing a 40/40/20 fund approach a 7 year Sharpe Ratio should be good enough for DVK's portfolio.

    It also seems to me that if you are rebalancing your three funds annually you are likely to have a "turnover" of 66% most years.

    Why are long term Sharpe Ratios important for your funds and turnover unimportant, while at the same time the exact opposite is important for DVK's performance?

    Talk about moving the goalposts. It's almost comical.
    Jul 16, 2015. 08:22 AM | 2 Likes Like |Link to Comment