Trading out of boredom?

A Bloomberg article that we found on Yahoo finance caught our attention today and we would like to share a few remarks.

Trading vs Rebalancing

This is not the first time that we've heard about retail investors placing a higher number of buy and sell orders since the coronavirus lockdown started. Most (if not all) of the online brokers serving retail investors have a note on their website along the lines that they are experience a much larger number of customer service requests. In some cases we observed that brokerage websites also showed signs of stress, e.g. some data not updating as quickly as it used to.

So there is some evidence that there are more orders being place, whether that is for stocks or options or other derivatives. We believe that trading, in particular day trading where you start and close a position on the same day, does not fit our investment preferences.

Having said that, we also observed an increase in the number of orders we placed since beginning of the year. All of those orders, however, were to rebalance our portfolio. Based on our data, there were more positions requiring rebalancing due to the significant fluctuation of the stock markets. There were days with declines or increases of 10% and more.

Not all stocks that we own moved to the same degree, though. Throughout the last few months and this is still ongoing to a lesser degree, there is a high uncertainty as to the effect of the coronavirus on particular companies and sectors. Because of this uncertainty, it appears as if "favorites" change within days.

As a result there was an increased need to rebalance our portfolio and keep all positions closer to the target allocation. The upside was that the vast majority of these adjustments resulted in additional gains due to buying at lower prices (the stock was "out of favor") and selling at higher prices (the stock was "in favor"). All of those buy and sell signals were created by our algorithms, so all we had to do was approve the suggested orders.

This kind of "trading" can help to improve the portfolio performance. Our data shows that without those short-term trades the performance would be lower. Still, this is no day trading. There was not a single cases where we started a position then closed it within the same day. Equally there was no case where we traded the same ticker symbol twice on a given day.

Therefore in our view rebalancing helps with performance. However, we are staying away from day trading.

Technology Sector

The Bloomberg article also quotes a co-head of derivatives strategy at a trading firm, referring to "message board trading" when people buy or sell based on whatever they read at a given point in time. He mentioned Apple Inc (AAPL), Stitch Fix Inc (SFIX) and TripAdvisor Inc (TRIP) as affected by this type of "trading".

For day traders it may make sense to look at individual stocks. However, if you take a longer term view then looking into the technology sector may make sense as long-term position in a portfolio. So instead of trying to make money as an amateur day trader with individual stocks it might make more sense to just buy into a basket of companies and keep that investment for a very long time.

Buying a basket can be achieved with exchange traded funds (ETFs). For the technology sector low-costs funds include SPDR Select Sector Fund - Technology (XLK) or Vanguard Information Tech (VGT). There are others more but these are good starting points for further research. In all cases you should seek independent advice. And before making a decision you should definitely also find out the ETF's portfolio, i.e. which companies do they invest in.

Using an ETF also helps reducs the risk that is associated with a direct investment in an individual stock. If the company you pick gets into trouble then your investment is likely to loose quite a lot. That same stock in an ETF is only one of many, at times hundreds of companies, so the risk that is unique to that company has only a very limited impact on the ETF portfolio and therefore price.

As always, do your own due diligence and seek independent advice before making decisions.

References

Article: "Bored Day Traders Locked at Home Are Now Obsessed With Options": https://finance.yahoo.com/news/bored-day-traders-locked-home-152732093.html

Note that we do not receive any compensation for mentioning any product, e.g. ETFs, in this post.

Reducing CARR; Increasing XLK

Rebalancing

As part of the continuous rebalancing of our US portfolio, today we reduced our position in Carrier Global Corporation. The position was started early on 03 April 2020 when Ratheon and United Technologies (UTX) merged into Ratheon Technologies (RTX) and at the same time spun off Carrier Global Corporation (CARR) and Otis Worldwide Corporation (OTIS). Since this spin-off we added more shares in CARR. Today we sold some CARR shares at USD 18.51. With unit costs at about USD 14.46 this represents a gain of about +28%. An excellent yield for a holding period of about 7 weeks.

With the proceeds we increased our position in SPDR Select Selector Fund - Technology (XLK), which we had started on 15 May 2020. The reason we added XLK to the portfolio was the observation that over the last few years growth stocks and in particular technology stocks outperformed value stocks. Dividend Aristocrats are a very solid base investment and represent value stocks.

We picked the technology sector as by and large the age of internet, cloud, Artificial Intelligence (AI), big data and [insert your favorite technology buzz word here] has barely started. Previous technical revolutions such as the industrial revolution or the Age of Steam had what Carlota Perez calls an "Installation Phase" followed by the turning point. We agree with Perez in that we have most likely have reached that turning point for the Age of Information and Telecommunications. We believe that for the next few decades technology companies should be well positioned to benefit from what we think is a long-term trend. Companies such as Amazon, Google or Microsoft are just the beginning. There are many more to follow.

To spread out the risk and only gradually add technology stocks we decided to utilize an Exchange Trade Fund (ETF) to start this position. At some point we may decide to add more direct investments in technology companies to our portfolio. As of writing we already have positions in Apple (AAPL), Microsoft (MSFT), Atlassian (TEAM), Nvidia (NVDA), Texas Instruments (TXN) and similar more.

Do not assume, though, that we are moving away from dividend aristocrats. Instead we believe that those still represent a very sold core investment. Therefore we continue to own shares in all 66 dividend aristocrats. We simply are "spicing up" the portfolio with some investments in the technology sector where we believe we have a sufficient understanding of the long-term opportunities of the company in terms of benefitting from the Age of Information and Telecommunications.

By mixing in some technology stocks to the dividend aristocrats we expect the performance of our overall portfolio to be between dividend aristocrats alone and the S&P 500. In other words, we expect our specific portfolio structure to perform better than the dividend aristocrats alone.

References

For more information about the work of Carlota Perez in particular her book "Technological Revolutions and Financial Capital" see her web site at http://www.carlotaperez.org/

We do not receive any benefits from any of the source listed in references.

Today's Rebalancing: Apple (AAPL)

Today we decided to reduce our position in Apple (AAPL) to some degree. Originally we started this position in July 2015 at a price of USD 125.00 per share.

Today we sold shares at a price of USD 299.40 per share. This represents a gain of 139%. This is a quite satisfactory result.

The proceeds are intended to increase other positions in our portfolio next week. At present candidates are Walmart (WMT), Franklin Resources (BEN) or A.O. Smith (AOS). Typically, the final decision is made on the day.


Disclosure: We hold positions in all of the companies mentioned in this post. Do your own due diligence and consult with a financial advisor before making financial decisions. This blog is for inspiration only. All responsibility with decisions you make is yours.

Top 5 Positions as of 19 October 2018

We didn’t by or sell anything since we last published the list of the five biggest positions in the Optarix US Portfolio. However, since 26 September there have been a couple of changes in the list. As of 19 October, the five biggest positions and their gains were as follows:

1. Emerson Electric (EMR) +27.87%
2. Vanguard Total Stock Market (VTI) +28.44%
3. Apple (AAPL) +74.48%
4. Johnson & Johnson (JNJ), +19.77%
5. Aflac (AFL) +20.72%

Emerson Electric (EMR) remained our largest position. Stanley, Black and Decker (SWK) dropped out. Instead Johnson & Johnson (JNJ) entered in fourth. Apple moved up from fifth to third position. 

In particular in the last two weeks there were quite a few market drops for 2% or even 3% in a single day. Occasionally, there was a day with a slight uptick but overall it has become clear in our opinion that market participants have become much more cautious in light of the current challenges. 

For one the interest rates keep rising in the US for the time being. As of writing the yield on 10-year government bonds has increased to 3.195%, which is up from 2.339% at the end of September 2017. The interest rate for 3-months treasury bills increased from 1.04% to 2.27% in the same time frame. Looking at our portfolio the dividend yield changed from 1.99% to 2.20% in the same time frame. Given this data we believe that there is not much upside at the moment in the markets until it becomes clearer by when the US Federal Reserve will change from tightening to neutral. 

Rising interest rates are poison for the stock market. In addition to that we also have the increasing trade tensions but also political uncertainties. For example, the Jamal Kashoggi case is threatening the relationships between the US and Saudi-Arabia. The United States are considering recreating from nuclear arms agreements with Russia. The trade war with China as well as the military issues in the South China sea don’t really help either. The outcome of the midterms, which looked like a homerun for the Democrats, is no longer certain either. These just some of the factors that we believe negatively influence the market participants at the moment. 

What does this mean for the long-term investor? We believe it is more important than ever to spread the risk across a large number of positions. And it is critical to invest only in high-quality companies such as dividend aristocrats. As an investor it’s important to minimize emotions as much as you can when observing the daily ups and downs of the market. Long-term we are confident that shares still represent a very good option to participate in the long-term growth of an economy. If the market falls, then what it really means is that you can buy the same quality shares at lower and hopefully more reasonable prices again. Rising profits could also help to get valuations back to a more reasonable level. 

Happy Investing! 

Disclaimer: We own share in all the companies mentioned. We have no plans to initiate or change any position in any of the stocks mentioned in this post in the next 48 hours. This post is not financial advice. You are responsible for due diligence before making financial decisions. Always consult with your financial advisor.

Top 5 Positions As Of 26 September 2018

Because of the changes in the Optarix US portfolio in September 2018 as well performance of individual positions, the top five positions in our portfolio has changed. As of 26 September 2018, the five positions with the highest weighting are now:

1. Emerson Electric (EMR) +36.6%
2. Vanguard Total Stock Market (VTI) +36.9%
3. Stanley, Black and Decker (SWK) +38.5%
4. Aflac (AFL) +29.5%
5. Apple (AAPL) +76.9%

The position that dropped from the last list is Atlassian Corp Plc (TEAM). We reduce that position earlier this month. It was the 4th time that we reduced TEAM to reduce our risk exposure and rebalance our portfolio.

Apple (AAPL) has re-appeared in the top 5. We started this position in July 2015 at a share price of USD 125.00. We sold some shares in December 2017 at USD 174.89. As of writing AAPL is traded at about USD 222.00.

While we like it a lot when shares gain in value, we use the right opportunity to reduce larger positions and to either add to smaller positions or - more likely at the moment - we start new positions altogether. At the moment the portfolio is still in a very early stage. By that we mean it has only 35 positions. We are aiming for about 50 to 100 positions in total, most likely a combination of dividend aristocrats and high-tech growth companies.

We see high-tech growth companies as a higher risk. However, at the moment they also tend to produce gains faster. Effectively we are accepting the higher risk for better returns. At the same time we also take money of the table at the right time to generate cash for starting new positions in either dividend aristocrats or other high-tech stocks.

Happy investing!

Disclaimer: We own shares in all companies mentioned. We have no plans to start or change a position in any of the stocks mentioned in this post in the next 48 hours. This post is not financial advice. You are responsible for due diligence before making financial decisions.

Is the Correction Over?

Even though the markets recovered somewhat on Friday, at the end it was another bad week with losses for the leading US market indexes. The S&P 500 shed 7.23% this month and was down more than 10% at some point. Does Friday’s recovery mean the correction is over? We don’t think that anybody actually knows for sure.

We always prefer a longer term view. The volatility within a few days or even weeks is not important. One of the two main benchmarks we use is the S&P 500. It has an average return over the last 10 years of 10.41% and a CAGR of 8.49%. Our US portfolio has outperformed this benchmark since we started this portfolio in January 2017. December 2017 and January 2018 produced excess returns of about 4% on a year-to-year basis. The number of data points is still too small. Perhaps we just got lucky and in future we won’t be able to produce an excess return. Only time will tell if the excess returns are sustainable.

Let’s have a look at how the setbacks in the last two weeks influence valuations. 

For example Apple (AAPL) is now available at a price/earnings (P/E) ratio of 15.94. Forward looking P/E ratio is 12.5. When we look at the average annualized total return for AAPL, its value is 19.72% over the last 5 years. They just announced their biggest quarterly profit of all times. Apple now has an installed base of 1.3 billion mobile devices and they add more each month. While a large portion of their revenue is generated by the iPhone, their service business is growing faster than the iPhone revenue. As a result the share of services is now 9% compared to 6% of revenues. There are indications that Apple Music may overtake Spotify in the US market as the largest music streaming provider. Since Apple started to pay a dividend they have increased their dividend each year. They are sitting on a large pile of cash. Now that they can repatriate that cash into the US at a much lower tax rate, more of it could be appropriated to buying back shares and increasing the dividend. This is not to say that they will actually do that. But there is definitely more wiggle room for it. All taken together, in our view this means that the “For Sale” sign went up on Apple stock. This might be a good buying opportunities either now or until the current correction has bottomed out.

Looking at dividend aristocrats, another group of shares that we really like, the picture in terms of valuations is improving as well. Before the recent market declines most of them had P/E ratios of over 20 or even 30. Some still do. But some now some have become available at P/E’s of less than 10. For example AT&T (Ticker symbol 'T') has a P/E ratio of just 7.74 as of writing. Yes, there are reasons to be cautious in their case. AT&T’s liabilities are at 71.85% of their total liabilities and equity in the latest quarter. Long-term debt is at 34.86%, so any increase of interest rates could impact their bottom line. On the other hand large mobile phone providers like T Mobile USA and Sprint have indicated that they will scale back their discounts throughout this year removing some price pressure. This should help AT&T as well. The pending acquisition of Time Warner is not approved yet and the settlement talks with the Department of Justice (DOJ) fell through in December 2017. The lawsuit continues and the outcome is far from clear. One option that AT&T could consider is a (partial) float of their DirectTV business to generate some cash. The upside for AT&T’s stock is that their dividend yield is a generous 5.33% and they being a dividend aristocrat they have increased their dividend for at least the last 25 years. While some of their decisions are risky, the sheer fact they are willing to make significant changes demonstrates that they are taking concrete steps to secure their future.

So, perhaps, it’s best to take comfort in the knowledge that in general buy-and-hold is a long-term strategy that has worked out for other long-term investors like Warren Buffett, provided you selected quality stock in the first place. Setbacks in the stock markets could be buying opportunities!

Happy investing!

Disclosure: We own shares of Apple and AT&T. We don't have a position in any of the other companies mentioned in this article. We have no plans to change our positions within the first 48 hours after publishing this post.

Mobileye, Intel and BMW

Mobileye have announced that they will stop the collaboration with Tesla (TSLA) from October 2016 and focus instead on their collaboration with BMW and Intel (INTC) to develop a fully autonomous car by 2016.

This is a set-back for Tesla. Mobileye's technology is a key element for Tesla's autopilot system. We can only speculate if the recent fatal accident of a Tesla Model S, when a crossing vehicle wasn't detected by the autopilot, contributed to Mobileye's decision. Mobileye says that their new chip called "Eye4Q", expected for 2018, will be able to detect vehicles crossing lanes. Mobileye are also collaborating with Volkswagen and General Motors.

This news is another, albeit small, confirmation of BMW's strategy to develop new mobility concepts. With Daimler and Audi they acquired the mapping service Here. With Toyota BMW are collaborating in the area of hydrogen-powered fuel cells. With Mobileye and Intel BMW are collaborating on developing an autonomous car by 2016, most likely a new model under their i-series of cars. In combination this paints a promising picture for BMW: They continue to be willing to take risks to innovate.

We remain optimistic about BMW's future. They are a well-managed company in our view and we like their brand management across BMW, Mini and Rolls-Royce. We believe that they are in a good position to fend off companies like Tesla. This includes Apple (AAPL) and Google (GOOG) who are working on electric and/or autonomous cars as well. BMW have increased their dividend in each year since 2009. In contrast to other companies in the automotive sector, they continued paying a dividend even during the global financial crisis (GFC). Based on estimated earnings for 2016, BMW has a fairly low price tag at 7.75 for the price/earning ratio.

Disclosures

• We have owned BMW shares for over 10 years and intend to buy more once the downward trend ends that started in early 2015
• We have owned Toyota shares for over 10 years and have no plans to buy or sell in the next 48 hours
• We own Apple shares but have no plans to buy or sell in the next 48 hours
• We have no shares in any of the other companies mentioned in this post and we have no plan to buy in the next 48 hours