Monday, December 23, 2019

Sell High, Buy Low to Improve Portfolio Performance

Rebalancing in General

Generally we follow an equal weight approach for the Optarix US Portfolio. This means each positiion has roughly the same value in the portfolio based on market prices.

If a position becomes too large relative to other positions, we may choose to sell some portion of that position. With the cash from such sales and the cash from dividend payments we then increase positioins that relatively to other positions have a lower value. This is called rebalancing.

As a result we tend to sell shares at somewhat higher prices and buy at somewhat lower prices. Note though, that what constitues a high or low price changes over time. The main factor here is where the market and as a consequence the overall portfolio is headed.

Let's look at a couple of specific examples.

Rebalancing with AbbVie

In July 2016 we started a position in AbbVie (ABBV) at a total cost of USD 63.28. In February 2018 the position relative to the overall portfolio became too large for our taste and we sold some of it at a price of USD 117.73, a gain of about +86%, not bad for an investment of about 1.5 years.

In July 2019 the position in ABBV had decreased again compared to our other positions in the portfolio. We decided to increase our position again at a price per share of USD 73.66.

As of writing the price for ABBV is USD 90.17, or +22.4% for 5 months. The shares of the original investment are up from USD 63.28 to USD 90.17 or +42.49%, still quite a satisfactory gain in particular considering that dividends are on top of those numbers.

Rebalancing with Nvidia

The second example is Nvidia (NVDA). Our timing was terrible when we started a small position in May 2018. We paid USD 249.57 per share at that time. We thought that with the increased demand in using graphics adapters for Artificial Intelligence (AI) in data centers but also for assistance systems in cars, Nvidia was well placed in the long run. Also, they have increased their dividend for many years in a row now.

What we didn't anticipate the significant decrease in demand in crypto mining. In the aftermath of a hype in that space, a lot of inventory was built up in the channel and Nvidia had to slow down production. This impacted their results for a few quarters.

So we almost doubled our position again by buying more shares in May 2019 at a price of USD 144.25. At that point our initial shares had a loss on paper of about -42.20%.

As of writing NVDA's share price is at USD 238.81. The shares we bought in May 2019 have unrealized gains of +65.55% while the initial position has unrealized losses of -4.59%. All up, the total position is now up +16.58%.

Summary

By selling relatively high and buying relative low, it is possible to improve individual positions in your portfolio. The emphasis is on the word "relative" for making such sell or buy decisions.

We are not trading on a daily basis. The operative word is patience. You can't force it for a specific position. However, if you have 50 or more positions, then once in a while opportunities open up.

Keeping emotions out of the picture by following a well-defined set of rules helps making better decisions. We have missed out for example on increasing our position in Netflix when they were at USD 231 (now at USD 333). Our rules don't catch all opportunities. However, they spot a good number of good bets.

Disclosure

We own shares in all companies mentioned in this article. We have no plans to change any of hose positions in the next three trading days. Past results are no guarantee for future returns. Do your own due diligence and consult your financial advisor before making investment decisions.

Saturday, December 21, 2019

Results Nov 2019: +1.88% Active Return vs S&P 500

US Portfolio Performance

Another good month for our Optarix US portfolio. Our objective is a result that is roughly in line with the S&P 500, doing +1.88% better than the index over the last 12 month and 1.39% better each each over the trailing 2 years is quite satisfactory.

Looking at the performance of our own Optarix US Portfolio as of 30 Nov 2019, the results are quite satisfactory, too: +15.68% for 12 months and 10.31% annually for the last 2 years. All of these is after taxes and fees.

1 year 2 years
S&P 500 +13.80% +8.92%
Optarix US Portfolio +15.68% +10.31%
Optarix Active Return +1.88% +1.39%

Values in this table are annualized for periods of over one year.

Here are updated graphs for both the active return over 1 year periods as well as the information ratio of the Optarix US Portfolio against the S&P 500, both for the time from November 2018 to November 2019.



Please note that past performance is no guarantee for future performance.

Other Developments

Since the last block post we have also completed our goal to add posiitions for all dividend aristocrats in the S&P 500 to our portfolio. The dividend aristocrats, i.e. companies that have increased their dividend each year for at least 25 consecutive years, represent our base investment.

In addition we have a small selection of investments in the hightech sector. Examples are companies such as Microsoft (MSFT) or Atlassian (TEAM). We select these companies based on our opinion about their business model, their growth perspectives, their profitablity and - where present - a history of increasing their dividends from when they started to pay dividends.

Over the last few months the trade wars and the looming Brexit were topics that we think influenced the markets. Surprisingly despite the trade tensions, the economies in the US has been astonishingly robust. The Federal Reserve has cut the rates this year and believes that for now they are in an observing position. If needed, however, they will act when and as appropriate.

The ECB is keeping interest rates low as well. They have also restarting their bond buying program, pumping even more liquidity into the markets. Interest rates for German Bunds remain negative and it doesn't appear as if they move into positive territory any time soon.

At the time of writing the newly elected parliament in the UK has approved Boris Johnson's Brexit deal. The plan is that the UK will leave the EU at 31 January 2020. For the relationships after the Brexit the UK wants to negotiate an agreement with the EU by December 2020. We believe this timeframe is very ambitious looking at past examples of trade agreements. In all cases the upside is that finally there is clarity: The UK will leave the EU, with or without an agreement.

In the US two articles of impeachment against President Donald Trump have been approved by the House of Representatives. However, they have not been passed on to the Senate. We believe that unless something material changes, the impeachment will struck down in the Senate by the republican majority. We also believe that for the time being the impeachment will have little impact on the financial markets.

It terms of US politics we think it will be more interesting to follow reliable polls after the democratic challenger has been determined and as both large parties prepare for the elections at the end of 2020. We think the result of those polls is likely to have a bigger impact on the markets in particular if they are tight, i.e. within the margin of error, or inconclusive.

Portfolio Changes

In November we increased our positions in Colgate-Palmolive (CL), Ecolab (ECL), Mc Donald's (MCD) and McCormick (MKC).

Suggestions For Your Portfolio

Generally we suggest an equal weight portfolio. That means that all your positions have roughly they same market value. Obviously this changes over time as some positions go up in value and some may go down. If that happens rebalance by buying/selling to get each position back to their average.

Increase

With this idea in mind, here are some suggestions for companies for your consideration to add to your portfolio. These are all dividend aristocrats. As of writing the look more attractively priced than the average.
  1. People's United Financial Inc (PBCT)
  2. Franklin Resources (BEN)
  3. AT&T Inc (T)
  4. Chevron Corporation (CVX)
  5. Wallgreens Boots Alliance (WBA)

Decrease

Equally, if you have a position of one of the following and that position is above average in your portfolio, we suggest considering reducing them. Relative to all S&P 500 dividend aristocrats they are a bit more ambitously priced at the moment.
  1. The Sherwin-Williams Company (SHW)
  2. Becton Dickinson and Company (BDX)
  3. Brown-Forman Class B (BF.B)
  4. Abbott Laboratories (ABT)
  5. Ecolab Inc. (ECL)
As always, while we can make suggestions to consider, we cannot accept any responsibility for your investment decisions. We strongly recommend that you do your own due diligence, buy only what you understand, buy only what fits your individual objectives and circumstances, and in particular that you seek professional advice from your investment advisor.

Disclosure

We hold positions in all of the companies mentioned in this post. We also intend to add to our position in WBA in the next 3 trading days. We have no intentions to change any of our other positions.

Friday, March 15, 2019

Shopping List March 2019 (Beta)

As an experiment, we want to provide on a monthly basis a list of dividend aristocrats from the S&P 500, that we believe are more attractive in relative terms than all other dividend aristocrats. At Optarix we call this list our "shopping list". To determine what goes on the list we are using a combination of price/earning ratio (P/E ratio) and dividend yield that is then translated into a score.

The list for March 2019 looks as follows:

Rank
Name
Ticker
Price (USD)
P/E ratio
Yield
1
AT&T Inc.
T
30.67
8.713
6.74%
2
AbbVie Inc.
ABBV
81.34
10.283
5.35%
3
Cardinal Health Inc
CAH
50.27
10.473
3.75%
4
People’s United Financial Inc
PBCT
17.36
13.252
4.01%
5
Exxon Mobil Corporation
XOM
80.15
16.094
4.08%
6
Franklin Resources Inc.
BEN
33.32
10.413
3.20%
7
Chevron Corporation
CVX
125.31
15.963
3.82%

As a reference: As of writing the S&P 500 (SPX) stands at 2,822.48 and the S&P 500 Dividend Aristocrats stands at 1,187.79.

The intention is to publish our shopping list on a regular basis and then revisit the list in the future.

How To Use The Shopping List
At Optarix we use this shopping list to compile a shortlist of positions we consider adding or increasing in our portfolio. At present we have shares in all of the above except for People's United Financial and Chevron. So we may choose to add these or we may choose to increase our positions in any of the other five over the next five months.

If you wish, you could use this list in different ways:
  1. To start a portfolio, invest an equal amount in each of these seven stocks
  2. If you have a diversified portfolio already, you can use this list to pick one or several to your portfolio
  3. If you have all of them in your portfolio already, then you could consider adding to one or several of these seven positions in your portfolio
Please note that there are several other factors that you may want to consider.

If you choose to start a new position, buy the stock only with an intention to keep them for at least 10 years. At Optarix our preferred holding period is "indefinitely".

The stocks in the shopping list are attractive on our view relative to the other dividend aristocrats in the S&P 500. We cannot say - in fact nobody can - how these stocks will perform in the future, relatively or absolutely. In particular we cannot make any predictions for these stocks as a group or for any of these individual stocks.

We believe, though, that all dividend aristocrats as a group represent a good, long-term investment and should see satisfactory average yearly returns over the next 10 years and beyond. "average yearly returns" means for any give year we may even see a negative return, e.g. the stock market may decrease a large percentage. Keep in mind that in the first decade of the century, the S&P 500 was down by over 60% year-on-year at a point.

You need to do your own due diligence. This post is not investment advice. If you choose to use the information in this post for inspiration and then go on doing more research on your own, then great! The stocks in the shopping list are a great fit for some portfolios. But they can be very bad choices for other portfolios, e.g. in terms of risk exposure to specific markets, industries, currencies, etc. or in terms of your investment goals and many more factors like these.

For the Optarix US portfolio we are considering to start new positions in either People's United Financal (PBCT) or Chevron (CVX) or both in the future. We may also choose to add to our positions that we hold in the other five stocks in the list.

Happy Investing!

Disclosure: We have positions in T, ABBV, CAH, XOM and BEN. We have no plans to initiate new or change existing positions in the next 48 hours.

Saturday, March 2, 2019

Feb 2019 Results: +1.54% Active Return vs S&P 500


The start into calendar year 2019 was quite impressive. The upside is that – on paper – the portfolios of many US stock market investors have seen a very good increase of value. On the downside this means that the price/earning ratio (P/E ratio) is increased again significantly. The pool of issues to choose from that are fairly priced, let alone underpriced, has reduced again. Among dividend aristocrats there are only two companies with P/E ratios below 10, i.e. Nucor (Symbol: NUE) and AT&T (Symbol: T). At the other end of the spectrum there are 5 with a P/E ratio above 30, and no less than 27 with a P/E ratio of over 20.

Generally, we use a rule of thumb that the P/E ratio should be no more than what we estimate the annual growth of earnings per share (EPS) will be for the given company over the next 5 to 10 years. Obviously, we cannot look into the future. We don’t know what the share market will be doing this week, this month or this year. It will fluctuate up or down (or both) in some random manner. We are convinced, though, that high-quality companies will do as well as the overall stock market, and dividend aristocrats will increase their dividend each year. And if one them doesn’t, we’ll sell shares that we may have in that company over a short period of time and close that position.

Equally, it’s good to see that occasionally there is a new addition to the list of dividend aristocrats. In Feb 2019 the new entrant was People’s United Financial Inc. (Symbol: PBCT). Using our own ranking system, PBCT is on position 1 of our “shopping list” at the moment. Generally, this means we may start a new position, typically by spreading several buys over the next 12 months.

Let’s now turn to the specific results for the Optarix US portfolio. For the 12 months endings 28 Feb 2019, the S&P returned 2.85% while our US portfolio returned 4.39%. Remember that we calculate all numbers after fees and after all taxes. These numbers mean that the Optarix US portfolio created an active return of +1.54%, i.e. this is the percentage in addition to what the S&P 500 returned for the same period. In the following graph you’ll see the active returns for the 12-month periods ending Feb 2018 to Feb 2019. There are 13 such periods.



This graph shows that overall the Optarix US portfolio did better than the S&P 500. One metric to assess the additional performance considering the additional risk is called “Information Ratio”. The metric is a number without unit. The higher the value the better. For the 12 months period ending 28 Feb 2019, the information ratio of our portfolio vs the S&P 500 was 1.43. Generally, any value greater than 0.6 is considered good or very good.

The following graph shows how the information ratio has developed from Nov 2018 to Feb 2019. Please do not read an upward trend into this graph. There is way too little data to support any trend in any direction. We are sharing this data just so that you get an impression of how the Optarix US portfolio is doing in terms of additional return and additional risk versus the S&P 500.


The annualized performance of the Optarix US portfolio as of 28 Feb 2019 is summarized in the following table:


Optarix US
S&P 500
Active Return
Trailing 2 years
11.87%
8.67%
3.20%
Trailing 1 year
4.39%
2.85%
1.54%

As always, please keep in mind that past performance is no indicator for future performance. Numerous studies have shown this. We don’t believe that the Optarix US portfolio is any different. If we can get close to the performance of the S&P 500 in the long run, that’d be great. At times we will fall short, e.g. in the 12 months ending 30 Jun 2018 (see graph above).

If the performance is better from time to time, we take that as a bonus not as something that happens just because we are so much smarter. We are not. We are just trying to apply some common sense including a buy-and-hold strategy. And we are happy to share our experiences both good and bad. 

Happy investing!

Tuesday, February 5, 2019

Jan 2019 Results: +1.39% Active Return vs S&P 500

After the previous month saw sinking indexes, January 2019 went better in terms of stock prices. The Optarix US portfolio again performed better than the S&P 500. For the twelve months ending 31 Jan 2019, the S&P dropped by -4.24% while our portfolio dropped -2.85%. As a result the active return was +1.39% for those twelve months.


We are quite pleased with this result. Again, the Optarix US portfolio performed better than the broad market. Again there was no change in the composition of our holdings. As mentioned previously we anticipate the next action to happen in Q2 or Q3 of this year. Most like that move will add one position to the portfolio.

Please note that we calculate returns after fees and taxes. Since your tax situation might be different and since you may have a different cost structure, your number may deviate from our results.

We'll continue to stick with our set of rules. Doing so takes biases and emotions out of the picture. Also, we don't believe that we will be able to "time" the market. Instead over time we will buy shares at times at favorable prices and at other times we may see a drop in the share price. That is of no concern to us as it will be on paper only. Our preferred holding period is "indefinitely". Therefore the actual share price is of no consequence once we started a position.

As with all rules there can be an exception. Let's assume we create a position at a price of $50 per share. If after a longer period of time, let's say 6, 12 or 18 months, the share price of that position has dropped significantly, we may add to that position if we continue to be convinced that the business in question is an excellent long-term investment.

We started publishing about our Optarix US Portfolio in January last year with announcing the results for the 12 months ending 31 Jan 2018. This means we are now in a position to also announce the results for the 2 years ending 31 Jan 2019. In those 24 months the S&P 500 increased by 8.93% annually while the Optarix US Portfolio grew by 11.46% annually. That's an annualized active return of 2.53%. The past yearly results were already encouraging. This first data point for a 2 year period indicates that the Optarix US Portfolio might be doing better than the S&P 500 over 2-year-periods as well.

Happy Investing!

Saturday, January 5, 2019

Dec 2018 Results: +1.43% Active Return vs S&P 500

December 2018 was yet another very volatile months for the US security markets. The main indexes ended the month near their low for the month.

The Optarix US portfolio was down as well. However, compared to the S&P 500 we managed to achieve an active return of +1.43% over our benchmark in the trailing twelve months (TTM). At the maximum, our portfolio was off the recent peak by about 18% in line with the broader market. Any number greater than 10% is typically seen as a correction, numbers greater than 20% as a bear market (Source: The Motley Fool). Based on that definition we are experiencing a correction but not a bear market yet.

The following diagram shows the active returns for all 12-month periods ending between Dec 2017 and Dec 2018. With the exception of June 2018, the Optarix US Portfolio performed better than the S&P 500. In other words achieved a positive active return.

(Click for Larger Version)


There were no changes in our portfolio in December 2018. Unless something unforeseeable happens we anticipate the next trade to be in Q2 or Q3 of 2019.

We rare sell shares. Our preferred holding period is "forever". We may sell shares once they appreciate in value too much so that their weight is beyond what we feel is commensurate to their chance/risk profile compare to our other holdings.  If that is the case we sell a small portion to bring the weight back in line. This plus cash flow from dividends is then used for entering new positions or adding to existing position. We roughly follow an equal weight approach. However, we are fairly patient in terms of the threshold at which we reduce or increase any of our positions. At times we may let a position continue to increase before we act.

While we cannot predict if the current correction will turn into a bear market, we continue to believe that using our set of rules for managing the Optarix US Portfolio should yield returns similar to the S&P 500. If things go well, we might see a better return than the index.

Happy Investing!