Winter in Calgary
November showed a nice rebound from the slump in October. I was able to take advantage of early month purchases of CSCO and PFE to get 12% and 4% gains respectively, buying at their low points. I also got an nice bonus in selling HYH which was a spin off of KMB (see questions below). Also the strengthening US dollar had helped me and may be slightly inflating the results. If shown in US dollars, my returns aren’t quite as spectacular.
As you have probably noticed, oil prices have tanked. That has driven down oil company shares considerably. Who knows how low the price of oil will go and how long this slump will last. 10% of my holdings are in oil, some of which I just bought in October (bad timing). The experts are predicting up to two years of lower prices, but the experts didn’t predict this price decline, so how can you believe them?
However, this does show the value of diversification. I spite of taking a bath on my oil stocks, I am comfortably up for the month. Hopefully there will still be enough cash flow in the oil companies to sustain their dividends. If so, then lower share prices are irrelevant as my retirement income stream continues. If they were to cut dividends that would create another dilemma as they would no longer meet my criteria. We will watch and see.
Here is an interesting excerpt from “The Connolly Report” discussing the dividend growth strategy:
If you are following this investment strategy, you are probably doing OK. You likely have little knowledge about the technical aspects of investing, but you know what works for you. Investment professionals know all the buzz-words and jargon and can analyze trends, moving averages and the like. But how do they perform on their own investments? Likely no better than you, and likely not as well as you perform on yours. HERE is an article with some evidence of that. Just keep on doing what you are doing and you will be fine.
Don’t Listen to the “Experts”
Take a look back on what the “experts” have said about the market. I have given a few examples below, but you can do your own search and find similar reports. You will find almost without exception that the experts are wrong and are always wrong in predicting the markets. Of course you will always find one or two who hit it right on, but more by accident and seldom more than once. With all their bafflegab, technical terminology and tools and models, they are no better than you at predicting the future. Trust your own analysis and make your own decisions. Ignore the “noise”. That is what I have been doing and look at the results.
Using my free ebook access to the Calgary Public Library, I borrowed an ebook on investing:
The 100 Best Stocks to Buy in 2013
The authors do not claim to be “professional” investors, but have written many books on the subject and would appear to hold themselves out as experts. They publish this book annually with a list of recommended stocks using their selection process.
In the book there is an appendix showing the stocks selected from 2011 and their performance. I could only see 85 stocks on the list, so I don’t know what happened to the other 15 stocks. Those 85 stocks combined for an average return of 3.6% for the period April 1, 2011 to April 1, 2012.s During the same period of time, the Dow Jones returned over 7% and the S&P returned over 5%. My portfolio returned over 10% during that time (including dividends, which the other numbers do not).
Perhaps their other years were better, but this sample did not instill confidence in their methods.
Once again this reiterates that when someone gives you investing advice, ask how well they have done with their investments.
These experts claimed there would be a crash bigger that 2008. It was written in June 2013. How did that prediction work out?
Experts predicted the S&P at 1950 by the end of 2014. Where are we now?
Questions From Readers
I get emails from people who read this blog. I am always happy to hear from anyone and if you have questions feel free to ask. When I run across questions that I think will benefit other readers I ask for permission to post the question and my answer. Here are a couple of recent examples.
“B” in the UAE asks:
I was wondering if I could bother you with another question. I just sold my first stock in order to get my hands on the capital gains ( as opposed to dumping something that no longer fit the criteria).
I like to buy all my stocks in batches of $10 000 because it makes them easier to compare. My ADP was up 60% so was worth $16000 and I thought it would be nice to get that 6000 out so that I could buy a Canadian stock on sale like the RUS.TO you mentioned in your last post. So I did a ratio and worked out that at current value of 85.3 per share I would have to sell 72 of my 191 shares of ADP which I just did. This means I still have 119 ADP shares in my account that are currently valued at roughly $10000 and I have 6000 to put toward the purchase of a new stock with a higher dividend and with more room to climb in capital gains. I was wondering if what I just did is a sound thing to do. One thing I noticed after doing it is that the book value of my ADP is no longer 10000 ( It’s 6000 something with 3000 something in capital gains ) so it won’t be as nice for making comparisons – I presume that isn’t a big deal.
My ITW is up almost 100% and I was thinking of doing the same with that one
I guess what I’m wondering is does it make any sense to do what I just did rather than to sell the entire stock – my idea is that I still have a limited stake in the original stock ( in case it continues to make capital gains) but I got some money out when the markets are high to buy a better one. I still have a few more years before I retire so don’t need maximum dividends yet.
Selling part of a stock holding to take some of the profits is a very common move. Most investment advisors recommend doing it.
If you are using TD Direct in Luxembourg, the one thing to keep in mind is the transaction fees. Theirs is quite high, so you want to buy and sell in larger dollar volumes to keep your fees lower on a percentage basis.
ITW and ADP are both still good stocks with A++ rating. I have sold both and replaced them with higher yielding stocks as I am looking for retirement income. I will likely do more of that in the next few months – DD and INTC are my next sell targets.
I am not keen on moving money between currencies as you always lose on “spread”, the financial provider taking a profit from the transaction. Now if you plan on converting permanently then its not a bad thing.
As you see, I just bought some RUS.TO to get the higher yield. It is a good stock but a bit volatile. ValueLine only gives it a B++, but they are hard on Canadian stocks. Even the Canadian banks only get a B++ or A rating from ValueLine.
When selling, the key is to have a reason to sell – the stock no longer meets your criteria; it has reached a peak; you want to replace with a different stock. Keep your selling to a minimum and buy when you have extra cash. Remember you are an investor, not a trader.
So in summary, I see nothing wrong with your moves, but I would be inclined to sell my whole position in a stock rather than just part of it. That being said, I am considering doing just that with my ENB.
David in Thailand asks:
I have a question: KMB recently spun off HYH shares. I notice in my TD (Internaxx) account the shares are in there, but there is no book price for them – it shows 0. So, what was their value when we received them? What is that benchmark figure to base how well (or not) the stock is performing? According to the KMB announcement, the day of record for the shares is Oct. 23. So, is that day we use to see the price of the shares to enter as the book price?
Also, “MM” in Doha suggests these stock shares are not gifted, i.e., they are deducted from our KMB stock shares. Is that true?
This spin-off is one of several that have happened recently on stocks on our watch list. COP and ADP are others of note. Spin-offs represent a carving of the value of any shares you own, not a net increase in value. However the reason companies do this is they believe the move will add value to both companies and often this is the case.
KMB filed for the spin-off of the new company (HYH) several months ago. KMB board approved this move on October 6, 2014 so that shareholders on record as at October 23, 2014 would receive one share of HYH for every eight shares of KMB. The shareholders received their new shares of HYH on October 31, 2014.
I held 200 shares of KMB on October 23 and bought 100 more shares on October 31. Then on November 6 I received a dividend from KMB of $1,376.39 which was immediately converted into 37 shares of HYH for an average cost of 37.20. This represents a 4% dividend on my KMB shares. I’m not sure why my 100 shares purchased on October 31 qualified for the dividend, but I guess I will take it.
My 37 shares in HYH do not fit my criteria, so even though it may be a good holding, I have sold them to stay consistent with my strategy.
Oddly enough, KMB share price has not been affected by this move and continues to rise. Perhaps it would have risen by more if the spin-off hadn’t occurred, but it is hard to know. The market has decided that KMB benefited by this move. With the stable price of KMB, this spin-off has resulted in an increase to my cash and no decrease in my portfolio, so I am happy.
HERE is a related article
Here is a question posed by Peter from Thailand and my responses.
The strategy is proving effective through good times and bad. Can you comment further on the major planks as I see them:
Spread the risk across asset classes
I don’t specifically look at diversification, but I do try to avoid having too much in any one industry sector. For example, I would love to have more Canadian banks, but I am already pretty heavy so I try not to increase my exposure. Same for Oil. I have lots of oil and am tempted to buy more given the low commodity price, but I have enough.
Sell high buy low by keeping the value of each asset to a fixed percentage of the portfolio
I do my selling in May, as per the adage, and buying in October. That has worked well for me. I usually cull out what I consider the lower potential or lower dividend stocks in the spring and do a major analysis for purchasing in the fall.
3. Enter low
Use simple moving averages or 52 week hilo to time market entry
I don’t have a magic formula for market timing on entry, but I share my lists and spreadsheets when I do buy. I use several factors in my analysis.
4. Buy yield
Use dividend cover and history to identify income yielding stocks.
I always look for a combination of dividend yield, history of declaring dividends and a long history of dividend growth.
5. Stay safe
Use a credit rating service such as Valuline to identify companies with the best balance sheets
There are lots of methods and analysis on evaluating companies and their financial strength. I know how to do it and have taught financial analysis for years. But you don’t need to know how it is done and I don’t actually do it on the stocks I evaluate. I used ValueLine and only buy their top rated stocks (A++). If a stock drops off that list I sell. None of the companies that have disappeared or went broke (eg Enron, Bear Stearns, CitiBank, etc) ever met the A++ category. A++ stocks are unlikely to ever disappear and would be downgraded long before that ever happened.
TK in Doha asks:
I am trying to decide on portfolio weightings and have a question – what do you think of BRK B as forming a substantial part of a portfolio?
I would never doubt what Buffet says or does. He has a long track record of success. Buffet himself now recommends that people just invest in ETFs that track the market (eg, DIA, SPY, etc).
That being said, BRKB is highly rated for strength and safety so you can’t go too far wrong with it. ValuLines sees a 6 to 12% annual return for the next few years.
Make sure you have an investment objective before making decisions. You also need an investment strategy that meets your objective. Then pick stocks that fit with your strategy. To do anything different is just random stock picking and no one has ever been successful with that.
My objective is building dividend income to support my retirement. My strategy is to select strong (A++) stocks with a long history of dividends and dividend growth. I currently set my dividend threshold at 3% (up from 2% before retirement). BRKB does not issue dividends, instead it reinvests it’s profits for growth. Therefore, as good as it is, it does not fit my criteria.
Generally I would not allow any one stock to exceed 5% of my portfolio. BRKB, however behaves more like an ETF, so a higher percentage might be OK.
Nothing wrong with it, but I would be more inclined to recommend an ETF as Buffet suggests. I don’t use ETFs as they don’t meet my income objective.
My current portfolio
|Bank of Montreal||BMO|
|Canadian Imperial Bank of Commerce||CM|
|Power Financial Corp||PWF|
|Great-West Lifeco Inc.||GWO|
|Thomson Reuters Corporation||TRI|
|Royal Bank of Canada||RY|
|Russel Metals Inc||RUS|
|Husky Energy Inc.||HSE|
|Public Service Enterprise Group Inc.||PEG|
|The Bank of Nova Scotia||BNS|
|National Bank of Canada||NA|
|Novartis AG (ADR)||NVS|
|Procter & Gamble Co||PG|
|Philip Morris International Inc.||PM|
|Royal Dutch Shell plc (ADR)||RDS.A|
|Total SA (ADR)||TOT|
|Unilever plc (ADR)||UL|
|Verizon Communications Inc.||VZ|
|Automatic Data Processing||ADP|
|E I Du Pont De Nemours And Co||DD|
|Johnson & Johnson||JNJ|
|Kimberly Clark Corp||KMB|
|The Coca-Cola Co||KO|
|Lockheed Martin Corporation||LMT|
|Altria Group Inc||MO|
|Merck & Co., Inc.||MRK|
Cisco systems – CSCO
Pfizer – PFE
A++, 2.5% dividend, dividend growth
|Company||Ticker||Dividend Yield||Dividend Growth 10-Year|
|Baxter Int’l Inc.||BAX||2.89||10|
|Deere & Co.||DE||2.81||15|
|Exxon Mobil Corp.||XOM||2.88||8.5|
|Int’l Business Mach.||IBM||2.8||19|
|Johnson & Johnson||JNJ||2.59||11.5|
|Merck & Co.||MRK||2.96||1.5|
|Novartis AG ADR||NVS||2.9||15.5|
|Procter & Gamble||PG||2.92||10.5|
|Public Serv. Enterprise||PEG||3.72||2.5|
|Royal Dutch Shell ‘B’||RDSB||5.06||7|
|Unilever PLC ADR||UL||3.73||9|