Saturday, June 25, 2022

Adventures in Perfect Information

When I was younger (in the early days of the internet, I'm not that old!) I always envisioned that as the information age washed over us, better information would be more readily available and we as a society would achieve a greater sense of knowing the path forward and make better decisions overall. 

Do you remember in economics classes we learned that in an economy that people were rational actors and that there was a concept of "perfect information".  The description from Wikipedia is below.

https://en.wikipedia.org/wiki/Perfect_information

In economicsperfect information (sometimes referred to as "no hidden information") is a feature of perfect competition. With perfect information in a market, all consumers and producers have complete and instantaneous knowledge of all market prices, their own utility, and own cost functions.

So from a personal standpoint, have we achieved an internal sense of informational nirvana? How are we doing on this "perfect information" concept? Do we know where the economy is going based on rule-based-data based off historical results? 

As an individual investor I think it's harder than ever to make good decisions based on information. For every post/site describing an imminent recession, there's another saying the bottom is in. Do you trust analysts? Look at the range on analyst expectations below?  Everywhere you look you see diverging views from experts. 

https://www.cnbc.com/market-strategist-survey-cnbc/
  https://www.cnbc.com/market-strategist-survey-cnbc/

So after 9 months of managing my money, what have I learned?

  • Perfect information does not exist
  • Do not fall for confirmation bias
  • Pick a few investing strategies, learn them well and follow the experts
  • Embrace diverging opinions and think critically about them
  • Protect your capital: 50% loss is 100% gain needed to breakeven
While it may seem obvious I think it's critical to think this way as someone with limited time on my hands and endless information. For myself, I've gravitated towards a dividend growth strategy and following some great macro analysis to help guide the sectors I should stay in or avoid depending on the macro environment. A part of me would love to buy and hold everything forever, and for some companies I think this is a great strategy, but there's too much great macro information out there to help guide decision making. 

Where do I usually go for my information? The links below (in no particular order and no references) are where I tend to gravitate for great information, as well as a number of mainstream resources.
So while I don't have perfect information, I'd like to think I have enough divergent opinions to help guide me through the current macro environment and aid in my decision making as an individual investor.

Let me know if you have some great resources to share!

Saturday, May 28, 2022

Week in Review

Happy weekend to all, and to those in the states I hope you enjoy the three day weekend. 

I've been making some readjustments the past two weeks, more to the defensive end. I am by no means a macro expert but I wholly enjoy reading the tea leaves trying to figure out where we're going. For me I'm seeing cracks in the foundation and I want to position myself ahead of where the ball is going.

A few days ago I retweeted below:  

This was an excellent summary of credit risk which is something we don't see making the news everyday. If you look at the St. Louis Fed graph below, you can see the high-yield spread rising over the last few months. 

While the Fed raises interest rates, I don't think we'll see inflation vanish immediately, but we will see slowdown in some businesses. We're already seeing some '22 outlooks being revised, most notably Target, due to inflationary pressure and uncertainty. As rates rise and pricing starts to lose it's stickiness, corporations would rather slow down hiring than surrender margin. 

All in all I think we're in for a challenging back half of '22, so with that I've reallocated a good chunk of the portfolio even more defensively.


For the first half of '22, Treasuries were not the flight to safety I expected. Along with the overall stock market they've declined substantially. With more challenging times ahead, I do believe there will be a flight to safety and I'm positioning myself ahead of that and keeping some powder dry for longer term opportunities as they present themselves.

From a sector basis I've heavily shifted to Utilities, Healthcare and Energy. I was already heavily positioned in Energy since the first part of the year, but I've bumped up utilities ($XLU) substantially. 

PADI: Projected Annual Dividend Income has declined to $8.5K mostly as a result of being heavy cash and the lower yield from treasuries. 

Dividends: Crossed the $4.8K mark thanks to Starbucks and Williams Sonoma (which I recently exited). 

Options: Rough week for covered calls as I had to buy back at a loss. I was able sell an $AMC $17 put for $100 profit. Overall I'm still negative $400 for options but I'm slowly clawing my way to the green by being more disciplined.

What's Next?  Right now I'm keeping my eye on forward looking signals to either confirm or deny my hypothesis. I'm comfortable with the allocations and may make little tweaks here and there, but will keep the overall profile above for the next few months as things develop.

Have a great weekend!

Sunday, May 15, 2022

Week in Review

Happy weekend everyone!  A short update this week as I'm nursing myself back to health after being sick for the week.

Performance:  Week over week -.47% compared to S&P at ~ -2.2% and NASDAQ at ~ -2.3%.  With violitlity high all last week and more headwinds coming, I cannot allocate more funds towards growth. I would love to, but I'm not ready yet. As I mentioned earlier this week, I have convinction in my picks but not in the general market at this time. 

Michael Gayed brings up a great point below. With stocks & treasuries down, where does one go for flight to safety?  Who's safe from getting crushed?  When Luna and other crypto ponzi schemes come crashing down, where will the money go?  I'm in agreement that treasuries have to pick up the slack at some point. I've been allocating a portion of the portfolio to $SCHO and moved some more last week ready to deploy into opportunities as I find them.



 Dividends:  When you can lose 2% - 3% of your portfolio any given day, sometimes income feels like a drip into a leaky bucket. Since we're going for the long-term here though, I'm comfortable the dividend growth stocks we've selected will weather the long-term fluctuations and keep adding up over time.

  • $MED - $42.64
  • $MMP - $137.99
  • $COST - $8.10
  • $MAIN - $21.72
  • $O - $28.65
  • $APPL - $11.27
Crossed over $4,500 in total dividends this week which feels great. In about 3 weeks we'll get to $5,000. 

Projected Annual Dividend Income (PADI) is ~$9.6K. Some of this is a function of some higher yield buys like $XYLD, $MMP, $ETO, $VZ, but I'm comfortable with the balance now.

Dividend Increases: Two weeks ago we received another increase in Telus, a Canadian telecom company. 


Options:
Netted $154 mainly trading $SBUX covered calls as they went downhill. Also sold $AFL and $PFE covered call expiring next week <.30 delta. I'm closing my red gap on covered call income and hope to be in the black by July. I am sitting on an $AMC $17 put that expires in July which should have room to grow. 

Sectors: I'm a little overweight on Consumer Discretionary in this enviroment. I don't consider Dollar General 'truly' discretionary if we're looking at a recessionary enviroment and while Lowes and Target may be down, these are comfortable longer term holds.



 I'm disappointed with Williams Sonoma performance. They rank very highly on my screener (23 out of 25 points), and a quick view on Stock Rover shows some great consistent performance. Sales growth, FCF, Gross Margin, Net Margin, all heading the right direction except the stock price. In a recessionary enviroment I'm sure they will not do as well, so I'll need to think about either holding or selling. It feels like the right company at the wrong time. 


Other Trading: Sold my remaining $NVDA shared Friday at a small loss. Fortunately I purchased in October, rode a wave to ~>50% increase and sold some shares at a high so was mainly playing with house money.  As a lifelong gamer I'm very familiar with $NVDA and have been using their products since early 2000's! As interest rates rise and we start seeing more crypto crashes, less drive towards crypto in flight of safety and real assets, NVDA will take a hit. Granted I think it's an awesome long term company, but I think they're still very overvalued.

Next steps: While I keep meaning to rebalance I have had very ltitle free time. If I felt the portfolio was grossly unbalanced I'd find time so for now I'm okay. 

Saturday, April 30, 2022

Week in Review

Glad to make it to the weekend after a brutal week in the market. 

After six months of tracking we're right back where we started! Pretty much dead even. Given what's happened in the market in the last 4-5 months, I'll take it. Starting in January I reallocated the portfolio towards a lower beta (~0.59) and shifted my sector weighting more towards consumer staples, utilities, energy and real estate. 

In some areas I've started a position in sector ETFs where to help balance out areas. Currently I have positions in $XLP (Consumer Defensive) and $XLU (Utilities). Both produce some yield and are sufficiently diversified until I can decide where to allocate towards individual companies.

I've also taken some of the portfolio and shifted to a higher allocation of short term treasury bonds $SCHO. Even as bonds take a hit, I think staying in the shorter term space is a good place to park some cash until I can see my way through the risk.


Unfortunately there is no telling when we can flip the switch from risk-averse to risk-taker. And by risk-taker I mean steer the dividend growth portfolio into a higher beta zone. While I'm not convinced we have seen the bottom yet, it's becoming clear there are some great dividend growth companies out there that are getting cheaper by the day. Great companies like Lowes, Target, Microsoft and Apple are off their 52 week highs. When I'm doing research I'm using SimpleSafeDividends primarily looking for companies that can weather the upcoming risk and continue to return capital. Lowes has done it for 59 years! 

While I won't make any major changes yet, I'll continue to monitor and ensure I'm investing in high quality companies with dividend reinvestment and any covered call income. 

Lowes annual dividends per Share

Dividends:  This week we had $210 worth of dividends.
  • $XLYD - $69.26
  • $CMCSA - $27.00
  • $QQQ - -$4.34
  • $ETO - $77.10
  • $AMT - $40.60
Dividend Increases:  
  • Apple lifts payout by 4.5%, achieving 10th straight year of dividend growth

    Apple announced its next dividend of $0.23 per share, a 4.5% increase over the company's previous payout of $0.22.

    The iconic technology leader has enviable brand loyalty and market positioning, which has allowed the firm to build a fortress of a balance sheet, consistently grow earnings, and maintain a conservative payout ratio.

    Increased annual income $1.96. (Big money!)

Options:
  • Bought some $54.00 $KR calls at close of business Friday hoping to capitalize on a bounce Monday. 
Next Steps:
  • I need to revisit the quarterly rebalancing but I'm not in a big hurry as I'm overall happy with things. Need to take a few profits on energy & utilities and take some consumer discretionary ($WSM) off the table and likely allocate towards more Consumer Staples. Not sure yet.  
Have a great weekend everyone!