As regular readers know, my crystal ball is cloudy at best. However, since the election, my prognostication skills have been particularly poor as the 'animal spirits' of the market have been ignited in a way that has truly perplexed me. Sure, I am glad that my portfolio is up in 2017 and up almost 20% in the trailing 12 months (and my dividend stream is more solid than ever), but it is hard to not suffer from FOMO ("fear of missing out") when the market is up 14% since election day and I am only up 5%.
In analyzing my performance, it is 100% obvious to me that my returns have lagged for two main factors: 1) my value focus and 2) lack of entry points.
My first point (my value focus) has been debated by many (and everyone should know by now that timing the market based on P/E ratios and the like is a suckers' game… even Keyes noted the "the market can stay irrational longer than you can stay solvent"). However, most market observers will call current valuations at least robust (if not using stronger language) and even a Google search for "stock market valuation" is illustrative.
However, I think it would be a mistake for me to throw in the towel and start buying shares of Snap (NYSE:SNAP) and the like with utter disregard for valuations. I would encourage anyone feeling invincible in today's market to read an excellent (and short) article by Ben Carlson.
Ben reminds everyone:
Bull markets can force investors to abandon a good process. Signals, guidelines, and policies that were put in place before stocks began their upward climb get pushed to the wayside because it feels dumb to manage risk when things just keep going up.
One of the hardest parts about investing is staying true and disciplined to a consistent process when others around you aren't. The fear of missing out during a bull market can quickly turn into the fear of being in during a bear market.
And above all, it's important to stay humble. While not always easy, humility may be one of the most useful traits you can develop as an investor during a bull market to remind yourself that the good times won't last forever and you're not as intelligent as rising markets may make you feel.
A second great article by Validea reinforces the point:
While growth [stocks] had been outperforming for years, the tables turned in 2016 and value stocks became the winners. In 2017 so far, growth is on top again but a long term value stock reversion is more likely than not given the performance of value vs. growth over the last few years.
FOMO is real and can be hard to endure. I think my takeaway is that you can't ignore process, but trying to become market timer (as I have partially become of late) is bad for wealth creation over the long term since you have to get it absolutely right ALL THE TIME for it to work as a strategy (and no one is that good).
However, this market's ascent (like all bull markets) has not benefited all sectors equally.
Note: this story is even more dramatic internationally where there have been significant deviations in performance over the last three months.
For me, I think the lesson is that I was correct to lighten my positions as valuations became overheated, but I should have sought out alternatives instead of going to cash (or broad market shorts). I hate to paraphrase Jim Cramer, but I think he is on the right path when he says "There is always a
bull attractive market somewhere."
My second reason for recent underperformance has been a lack of entry points. Believe it or not, I currently have over $60k of limit buy orders entered with my broker. I am a younger investor who believes in the long-term power of the stock market to generate wealth. However, I am very value focused and like to get a good deal (even if it is just versus yesterday's price). So to me, it is simply without belief that the S&P 500 has now gone 96 days in a row without a 1% down day! Let that sink in for a moment, not one single day had the broader U.S. market gone down a full percentage point (and closed there). No wonder I can't get an execution on my limit orders!
However, unlike the problem of persistent overvaluations I detailed above, this second point has a much easier solution. I am implementing a new rule for myself. If I sell a position, I will find another position to buy within the week. It can be debated whether the market overall is too high, but it is true without question that there is always a deal available that is better than the one represented by the stock I am selling. Implementing this rule will keep me invested and not let my cash position rise (so I will not miss out on rallies, even if they are generated from seemingly irrational places).
I believe the net result from these two insights will be a more invested portfolio that takes advantage of mispricings (instead of getting knocked to the sidelines by them). I would be very interested in my readers' thoughts on this, so please comment!
February echoes my solid (if unimpressive) start to the year as my 2% YTD 2017 return lags the 6% return of the S&P 500. However, cash payments (dividends and interest) drive my returns strategy. For the 12 months ending in February 2017, my portfolio's realized yield was 5.06% (based on its TTM value) and delivered $11,736.29 in cash to me. I hope to earn over $13,000 in cash payments in 2017 (a 12% improvement from 2016).
In February 2017, I earned $817.19 in cash (which was a 4% improvement over January 2016). Fear and greed are hard to balance (my greedy desire to own high yielders is tempered by my fear of a fall that leads me to hold significant cash and short positions), but overall I am happy with where I am. My yield-focused strategy still makes the most sense to me as paper gains may come and go but cash is forever!!
Since I write for Seeking Alpha primarily to improve my own investment portfolio, I think it is important that you know my objectives. Please consider this context when you look at any advice I give and form your own opinions based on your needs and desires.
- GOAL: Attractive, risk-adjusted, absolute returns (5-15% annually) over a long-term time frame while minimizing capital loss and extreme drawdowns.
- STRATEGY: 'Enhanced' dividend growth or DGI strategy that focuses on a core of diversified holdings (ETFs and individual companies - my general screening criteria: growing companies (YoY EPS growth >0%) with attractive valuations (PEG <1.5 and P/E <20) and strong and safe dividends (yield >4%, payout <90%, and market cap >$500MM) no tobacco stocks or micro caps), supplemented with return enhancing tools like hedges (derivatives and shorts), commodity exposure, etc., as well as some crazy picks.
- BALANCE: Blend of ETFs (domestic and international) and individual companies (where there is a compelling reason to own). Seek to not overweight any one sector unless there is a compelling reason to do so (although the nature of these investments leads me to be overweight in traditional dividend paying sectors like financials, REITs, and energy).
Note: I violate these guidelines constantly, so please call me out on it!
Portfolio Composition as of February 28, 2017
|Security||Type||Div Yield||Market Value||Last Month Value||Gain/Loss(%)|
|CORE DIVIDEND FUNDS||5.0%||$70,760||$69,817||1.4%|
|SPDR S&P International Dividend ETF (NYSEARCA:DWX)||ETF||5.1%||$11,396||$11,341||0.5%|
|SPDR S&P Emerging Markets Dividend ETF (NYSEARCA:EDIV)||ETF||4.6%||$8,830||$8,681||1.7%|
|WisdomTree Emerging Markets High Div ETF (NYSEARCA:DEM)||ETF||3.5%||$8,466||$8,303||2.0%|
|Global X SuperDividend REIT ETF (NASDAQ:SRET)||ETF||7.9%||$5,930||$5,840||1.5%|
|Deutsche X Trk MSCI EAFE Hdg Eqy ETF (NYSEARCA:DBEF)||ETF||2.5%||$5,764||$5,652||2.0%|
|Global X SuperDividend U.S. ETF (NYSEARCA:DIV)||ETF||6.7%||$5,052||$5,040||0.2%|
|Fst Tst Dow Jns Glbl Sel Dvd Idx ETF (NYSEARCA:FGD)||ETF||4.2%||$4,848||$4,813||0.7%|
|JPMorgan Alerian MLP ETN (NYSEARCA:AMJ)||ETN||6.3%||$3,277||$3,311||-1.0%|
|WisdomTree Germany Hedged Equity Fund (NASDAQ:DXGE)||ETF||3.4%||$2,937||$2,924||0.4%|
|Pacer Global Cash Cows Dividend ETF (BATS:GCOW)||ETF||3.3%||$2,819||$2,742||2.8%|
|SPDR MSCI Australia StrategicFactors ETF (NYSEARCA:QAUS)||ETF||4.0%||$2,554||$2,450||4.3%|
|iShares Asia/Pacific Dividend (NYSEARCA:DVYA)||ETF||4.4%||$2,422||$2,352||3.0%|
|Eaton Vance Buy-Write Opportunities Fund (NYSE:ETW)||CEF||10.7%||$2,174||$2,120||2.5%|
|Global X SuperDividend ETF (NYSEARCA:SDIV)||ETF||6.8%||$2,149||$2,130||0.9%|
|SPDR S&P Int'l Dividend Currency Hedged ETF (NYSEARCA:HDWX)||ETF||5.2%||$2,142||$2,119||1.1%|
|CORE DIVIDEND COMPANIES||7.2%||$73,257||$71,426||2.6%|
|Omega Healthcare Investors (NYSE:OHI)||REIT||7.6%||$16,320||$15,906||2.6%|
|New Residential Investment (NYSE:NRZ)||REIT||11.5%||$10,086||$9,021||11.8%|
|Blackstone Mortgage Trust (NYSE:BXMT)||REIT||8.0%||$6,228||$6,098||2.1%|
|Royal Dutch Shell (RDSB)||Company||6.8%||$5,500||$5,747||-4.3%|
|Care Capital Properties (CCP)||REIT||8.8%||$5,258||$4,942||6.4%|
|Ford Motors (NYSE:F)||Company||4.7%||$5,012||$4,944||1.4%|
|Kinder Morgan (NYSE:KMI)||Company||2.3%||$3,921||$4,111||-4.6%|
|Verizon Communications (NYSE:VZ)||Company||4.6%||$2,482||$2,451||1.3%|
|Senior Housing Properties (NYSE:SNH)||REIT||7.6%||$2,050||$1,905||7.6%|
|Icahn Enterprises (NYSE:IEP)||Invest Co||10.6%||$1,687||$1,780||-5.2%|
|SPECULATIVE HOLDINGS TOTAL||0.4%||$20,955||$21,214||-1.2%|
|United States 12 Month Oil ETF (NYSEARCA:USL)||ETF||0.0%||$5,904||$5,895||0.2%|
|Teucrium Agricultural ETF (NYSEARCA:TAGS)||ETF||0.0%||$2,561||$2,665||-3.9%|
|Market Vectors Gold Miners ETF (NYSEARCA:GDX)||ETF||0.2%||$2,285||$2,393||-4.5%|
|Teucrium Corn ETF (NYSEARCA:CORN)||ETF||0.0%||$1,941||$1,914||1.4%|
|VARIOUS POSITIONS OF <$1,000 VALUE||VARIOUS||2.0%||$4,118||$4,157||-0.9%|
|FIXED INCOME TOTAL||5.1%||$40,424||$39,845||1.5%|
|PowerShares Variable Rate Preferred ETF (NYSEARCA:VRP)||ETF||5.1%||$10,192||$10,000||1.9%|
|Goldman Sachs (NYSE:GS) - Pref A (GS+A)||Pref||4.2%||$9,782||$9,677||1.1%|
|Bank of America Corporation (NYSE:BAC) - Pref L (BML+L)||Pref||4.4%||$4,630||$4,524||2.3%|
|Blackrock Limited Duration Fund (NYSE:BLW)||ETF||6.6%||$3,196||$3,168||0.9%|
|Nuveen Floating Rate ETF (NYSE:JRO)||ETF||6.9%||$2,471||$2,432||1.6%|
|WisdomTree BofA Mrl Lynch HYBd ZrDr ETF (NASDAQ:HYZD)||ETF||5.2%||$2,403||$2,393||0.4%|
|Goldman Sachs - Pref D (GS+D)||Pref||4.5%||$2,270||$2,200||3.2%|
|WisdomTree BofA Mrl Lynch HYBd NgtDr ETF (NASDAQ:HYND)||ETF||4.8%||$2,115||$2,131||-0.8%|
|Nuveen Short Duration Credit ETF (NYSE:JSD)||ETF||7.0%||$1,832||$1,815||0.9%|
|Eaton Vance Senior Floating-Rate Trust (NYSE:EFR)||CEF||5.9%||$1,533||$1,504||1.9%|
|ProShares Short S&P 500 (NYSEARCA:SH)||ETF||0.0%||$8,638||$8,973||-3.7%|
|ProShares UltraPro Short Russell 2000 (NYSEARCA:SRTY)||ETF||0.0%||$8,458||$9,023||-6.3%|
|ProShares UltraShort NASDAQ (NYSEARCA:QID-OLD)||ETF||0.0%||$3,970||$4,324||-8.2%|
|ProShares Short Real Estate (NYSEARCA:REK)||ETF||0.0%||$3,329||$3,484||-4.4%|
|ProShares UltraPro Short S&P 500 (NYSEARCA:SPXU-OLD)||ETF||0.0%||$1,722||$1,937||-11.1%|
|T-Mobile US (NASDAQ:TMUS)||Company||0.0%||($4,377)||($4,359)||-0.4%|
|SCHWAB ROBO-ADVISOR TOTAL||2.0%||$11,132||$10,925||1.9%|
|TOTAL + CASH||$47,235||3.9%||$285,502||$289,879||0.50%|
Portfolio Moves in February 2017
SHARE BUY - Omega Healthcare: Bought an additional 100 shares of this healthcare REIT at $31.03 on February 9.
- Reasoning: I added to my largest holding because I like the valuation, focus, and yield.
SHARE BUY - WisdomTree Germany Hedged Equity Fund: Bought 100 shares of this German ETF at $29.24 on February 24.
- Reasoning: I wanted to add to my European exposure because I like the valuation.
SHARE BUY/SALE- Pitney Bowes (NYSE:PBI): Bought (at $12.55 on February 1) then sold (at $13.15 on February 3) 200 shares of this pharma stock.
- Reasoning: I had a deep out of the money buy order get triggered when the company missed earnings then slashed its dividend. However, I got a nice 5% profit for holding the stock for two days.
Watching the market soar to new heights while I have played it safe has been hard to stomach. However, with a new participation strategy, I think I can balance my value focus with staying invested to capture the long-term upward tilt of the public markets. Despite the market's current exuberance, I think the fundamentals are still fundamental (as the Benjamin Graham quote about voting machines versus weighing machines has proven time after time). So I will stick to what I believe is a proven strategy even though I will underperform at times (I'm just glad I don't run a hedge fund!). I am still heavily long the market and encourage others to stay true to their long-run strategy. These days, I am most interested in adding healthcare/IT dividend stocks and dollar hedged European dividend ETFs.
Disclosure: I am/we are long ALL POSITIONS AS MENTIONED.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author is an amateur who has a history of getting calls both right and wrong with zero predictive power. Trade at your own risk and never rely solely on this author's opinion. Also, as I have no knowledge of your circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.