A few prior threads have dealt with market price movements in general, and the relative rationality of market pricing in bubbles and busts. I thought it might be of interest to test the "buy low" theory - with fictional money. The contention here, is that these stocks have been irrationally oversold in a bear market, and will double within two years as reason prevails. All these companies are profitable and well off their highs, well-established with growth prospects.
Shares Price
EMR 314 31.88 IR 680 14.71 MSM 307 32.55 FAST 274 36.50 CHRW 210 47.71 DD 423 23.66 T 361 27.69 CSCO 637 15.70 BP 221 45.30 FISV 302 33.08
Total $100,033
Dividend payout $3,573 or 3.57%. Average PE 9.5 The average payout is around 41% (for the eight companies paying dividends).
I hope the above is interesting and useful to some as an insight into portfolio management, and invite comments.
If you created a tracking portfolio online, how about creating another one with the whole $100k in a US broad-market ETF? Easy way to track how the basket is doing vs. "the US stock market," to put its returns in perspective, including dividends for both. Would be interesting to see one vs. the other along the way too...e.g. a big rally in say financials or retail and your basket might be left behind, and vice versa.
A portfolio like that could be an excellent way to take advantage of dividend reinvestment plans (DRIPs). If any of these companies do not offer DRIPs, I would replace them with equally profitable and well established companies which do, if they could be found. I would even be satisfied with 8 or 9 instead of 10 if necessary. I would speculate that a do-it-yourself portfolio like that will beat index funds and the majority of managed funds in the years to come.
True, nobody can prove what will happen one way or another, so I used the term "speculate" in expressing that opinion. I am speculating that a DRIP portfolio like that would outperform an index or managed funds most of the time, on average, if it were possible to repeat the experiment over and over and keep records. So there would be no added risk. I would guess the main advantage comes from the absence of brokerage costs for purchase of stocks and reinvestment of dividends in DRIPs, and that in the long run it would outweigh the benefits of diversification.
but have noexperience with it. They say it's possible to allow others to see theportfolio. Do you have a site you're familiar with? Yes, an ETF orother would be useful :-) You are right, btw, about the financials and retailers. Those are not represented, even though those sectors have been crushed. COST or TGT and WFC might sub for MSM and CHRW. I'd like to keep it to profitable companies.
Kastnna I believe was being facetiously witty. But a better selection would probably include stocks that have not seen large declines, such as PG, GIS, ABT, MCD, WMT, and they may well have DRIPs. Trouble is, those would not measure irrational selling, and I betcha underperform the major averages. They've sold off a bit recently, which may be an indication of portfolio changes at ... dare I say ... "a bottom?"
The large brokerage houses now re-invest dividends and cap gain distributions for ETFs, stocks, and many mutual funds at no charge. So why do you think dobbs's picks are so superior to a chimp throwing darts or an index fund? Also, you are implying that some managed funds will beat dobbs and index funds. If so, why do you want to tie trustees' hands as you proposed in another thread recently? The point is the law should no sooner tie the hands of trustees as you suggested than it should tie anyone's hands.
As far as comparing dobbs's picks to a US broad market ETF, finance.yahoo's records make it easy to do this for the next few years.
Naturally I also pillory the notion that a few years is enough to measure how good a fund manager is. So for the record, this is an exercise just for fun.
We may be talking about two different things. A trustee's hands should not be tied, but a trustee must act in the best interests of the client and must be accountable. DRIPs are for long-term, do-it-yourself investors. I see loads, management fees, and brokerage costs as a drag on investment returns, a huge unnecessary intermediate level between the investor and a company. I don't believe small investors fully realize the extent to which these costs pull down the overall return over a long period of time. Along the same lines, surely there must be some way to set up a trust and accomplish its goals without involving a bank.
The fact that some managed funds beat the index may be true, but one never knows which managed funds will do so. And because a manager was successful last year or last decade, we know, there is no guarantee it will be true next year or next decade. The best plan is to strike out the costs of managers completely. Some funds beginning with the letter "A" will have strikinglysuperior returns in some years. But that does not mean that one should seek funds beginning with the letter "A" for future investment after that has hapened.
DRIPs are outdated with regard to the advantages you claim. Do some reading at the various big brokerage firms' sites about free dividend etc. reinvestment. Given the latter, why you think dobb's picks would beat an index fund is not clear to me, especially given that you are a proponent of index funds. I just do not want to encourage people to pick individual stocks instead of index funds the way you seem to be doing in this thread.
The only problem with all else you wrote was that you seem to be missing that someone who sets up a trust may very well want the trustees s/he designates either to use (1) active management; or (2) use what is their best judgment, which may happen to be active management. The trustees are accountable to the terms of the trust. You seem to understand that we do not tie ordinary investors' hands and require them to buy all index funds. Why should we do this with trustees?
As far as banks being trustees, given the average education level on investing of the typical person, I think most would be better off with bank as trustee, as long as the trust document is properly set up. Ideally the bank is a co-trustee AFAIC because banks et al. will try to churn the trust's assets and make the bank a buck through other fees.
George, I track a lot of things in portfolios on WSJ.com, in the past because of the links to news that came with it. I'm finding the WSJ less relevant these days (post-Murdoch), but still track portfolios there. It's a subscription site though.
A couple of broad-market ETFs to consider as proxies for "the US stock market" are VTI and IWV which are Vanguard's Total Stock Market index fund ETF, and the Russell 3000 iShare, respectively. Whether these are suitable risk-adjusted benchmarks would be a question for a mutual fund buying those stocks, but for an individual investor "am I beating the market?" is a good question to ask, given the ease of buying index funds instead...and I find very few people do that.
As someone mentioned you could always go back and reconstruct but there's something to be said for having it done automatically, with dividends, splits, etc tracked for you and the current "bottom line" visible at all times. It's surprising how often a basket of a dozen-odd stocks moves more or less the same as the overall market; when it doesn't it's interesting to see what explains the discrepancy. But if you don't know the index return there's no way of prompting these inquiries.
Thanks, Tad. I tried the stockalicious site and got down to BP ... they didn't recognize it. The DJIA is a useful benchmark that was close to 8400 at the time I priced the stocks. Let's see what things look like a year from now. I'm not sure precise figures add much to the comparison, and reinvesting dividends complicates purchase records. (One can justify holding dividends in cash as part of portfolio rebalancing.) If the portfolio above is $15k and the DJIA is
10,000 that should be close enough.
My observation is that stocks with low institutional ownership behave differently. Institutions tend to get their input from a few analysts, and act as a herd. What annoys me most about having fewer individuals is that Long Term Values (covering 4000 issues) was cancelled for lack of interest, and it was a really great source for spotting companies in rapid growth trends. Today, Value Line is the only publication I know of that still carries 15 year earnings histories. It seems to me that we're living in an increasingly institutional, quarter-to-quarter world, and we're paying for part of that today. Many didn't recognize what they were doing to themselves in the housing bubble, I think most do not realize what they are doing to themselves allowing financial markets to be closed off to individuals. (E.g. IPOs, Munis, secondary offerings, the proliferation of hedge funds.)
As you say, my information could be outdated, but it is my understanding that plans offered by brokerages and banks still have some charges, whereas most DRIPs offered by individual companies have no charges at all. We do not know what will happen in the future, but I would just as soon eliminate the middle man. Buying stocks directly and putting them in my safe deposit box appeals to me in these times of financial instability. I know nothing about the particular companies in dappedobbs' portfolio, but I like the number of companies (enough to get some diversification, but not so many that paperwork gets too cumbersome). If those particular companies offered DRIPs and also paid good dividends (and also, perhaps more important, had a past history of gradually rising dividends), then I think it probably would be a good choice for a small investor.
I personally invested in a selection of DRIPs some ten years ago and have had better returns from them than from mutual funds, although the difference is not huge. They are definitely not a way to make a killing or get rich quick. I have had better results with real estate than either DRIPs or mutual funds.
It is true that there is risk in picking individual stocks, but there is also risk in picking mutual funds and in picking financial advisors. In all three cases, research and a do-it-yourself frame of mind goes a long way toward minimizing the risk.
The thing is, dividends matter again! Which is part of the reason I suggested letting something automatic track them for you - even if you choose "leave in cash" as some portfolio-trackers let you do. The current yield on Diamonds, the ETF mirroring the DJIA, is about 3.4%. Ignoring them, assuming they aren't cut substantially, will overstate the relative returns of your list of stocks by a similar amount annually (more, factoring in reinvestment and eventual dividend increases). A 3% difference is huge in a world where mutual fund managers would love to beat the market by 2% per year.
Some studies have pointed this out as one of the errors in the old WSJ "dartboard portfolio" contest. It didn't factor in dividends, so the dart picks actually did a bit better than the ~40% "win" rate they had.
Funny, one of the first investing books I read in college finance courses was about "Generic Stocks" by a Cornell prof named Avner Arbel. The book didn't sell much (outside the campus bookstore) but his interesting contention was that you should find smaller stocks that aren't getting much attention, or perhaps are not even followed, but pass muster on some basic financial criteria. Buy a basket of them, then wait around until they get discovered (or "discovered again"). It was a somewhat shaky theory that relied on a few big winners, and was skewed towards small/microcaps during the years Peter Lynch was cleaning up on them. But I have to say, it's still one of the bricks in the overall "contrarian" foundation of my investing beliefs. Buy low, sell high often means buy when ignored/unloved, and sell when everyone loves it.
Adding to your point regarding institutional ownership: I contend that most institutional money is managed "for the quarter" or at most for the next 12-18 months, because that's the time frame after which many big-managers risk being fired. An individual investor not bound by that kind of short-term thinking arguably has an advantage.
Yes, I agree it would be better counting dividends, but I don't plan to add them in every year. It'll be a "mano a mano" closing price to closing price combat with the mighty DJIA !:-)
A very fine German colleague of mine haz pointed uot zat zer iss furzer biass in zee cheemps! Often overlooked! Ignored! And worse ... Unstatisticized! When I see the market dropping 500 DJIA points, and hurl my wet Kleenex across the room ... I aim for the center of the wall. Clever founders try to name their company accordingly ... Liz Claiborne, Minnesota Mining & Manufacturing, Newmont Mining, Oracle, Procter & Gamble ....
I don't know how many companies have risen 50 to 100 fold within my lifetime, but there are more than most people think. Avner was right, and you must have good intuition to have read his book. Some companies now have historians who would be flattered to tell you all they know about the earliest stages, which would be valuable information.
I'll sneak in a post about six months from now to compare. Yesterday, my annualized return indicated I would make over $1.3 trillion by the end of the year, so I think I'll go to the Bahamas and buy a villa (lol).
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