Educational

The few times I’ve gone camping in my life, I found the sleeping bag uncomfortable.  You’re completely covered in a sleeping bag.  It’s all or nothing.  You can adjust what you have on so that once you’re all zipped up in the bag, the combination of your clothes and the thick insulation provided by the bag is likely a perfect match for the cold outside.  But what happens if you gradually get warmer inside the bag?  You try unzipping and you fold down the flap and then… you’re freezing.  It’s still cold outside.  The problem is there are no layers, no way to adjust the coverage, no ‘in between’ option.  It’s too late to get back out and remove some clothes.  You can’t stand in the tent.  You don’t want to step on someone else.  That’s a workout at 2:00 am and you’ll never get back to sleep.

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Comfort in Calls Getting CoveredRead More »

Have you ever looked up the Price-to-Earnings Ratio (P/E Ratio) for a stock ticker, only to find it is ‘N/A’ or blank? What about seeing a stratospheric P/E Ratio of say 400? Here you thought you were doing some due diligence on a stock recommendation that came your way. You wanted to know if the stock is ‘expensive’ or ‘cheap’, but you hit a dead end.

Sometimes when this happens there’s a better option, and it is right in front of you – in The Upside Down.

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Plot This Ratio Before Your Next Stock PurchaseRead More »

Position sizing within a portfolio is an important component of managing risk.  In order to avoid excessive exposure to the performance of any one stock, investors will limit the weight of stocks within the portfolio.  It is not uncommon to invest, at least initially, equal amounts into each stock of a portfolio. Thereafter, the portfolio might be rebalanced periodically.

Suppose an investor has placed 2% of his nest egg into each of 50 stocks.  If one company goes completely out of business and the stock drops to zero, the portfolio has only lost 2%.  However, for more active investors who wish to purchase additional shares of only those stocks with the highest expected returns, maintaining an equally weighted portfolio becomes impractical; every time he wishes to add to one position, the same amount (give or take) must be added to the others.

This is undesirable, imperfect, unfortunate, indiscriminate.

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Check Your Portfolio with this FormulaRead More »

According to Chuckles Schwab, ‘dollar cost averaging is the practice of investing a fixed dollar amount on a regular basis, regardless of the share price’.

As they go on to say, ‘it is a good way to develop a disciplined investing habit’. It is also a good way to achieve average returns. We can do better.

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Dollar Cost AveragingRead More »

Now that the Royal Dividends portfolio has received its first dividend, it makes sense to address what we should do with them. Whenever you receive dividends from your various stock holdings, you have three options:

1. Spend the dividends.
2. Do nothing.
3. Reinvest the dividends.

All three options have merit. For instance, dividends are often a significant source of income for retirees. Retirees may use their dividend income to pay bills or buy groceries. However, for those in the saving phase of their lives, spending dividends is to be avoided. Reinvesting is best and oddly enough, the best way to reinvest involves doing nothing – at least initially.

Let me explain.

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The Best Way to Reinvest DividendsRead More »

After presenting five different methods for calculating beta in Excel, I used examples to demonstrate why beta should not be used to set expectations about future return. There are several reasons for this:

1. Beta isn’t even reliable for estimating the historical returns on which it is based.
2. Beta is a point estimate summarizing a multitude of data points.
3. A stock’s beta will change in the future.
4. Using beta for stock projections, relies first on a prediction of the market’s return – a futile task.

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On Beta (Part 3 of 3)Read More »

I thought it might be illustrative to look at two Dividend Kings with a nearly identical beta, but with very different average annual returns over the last five years (through July 2022): Lowe’s Companies Inc [LOW] and Stanley Black & Decker Inc [SWK].

Beta says both companies were 25% more volatile relative to the market, but Lowe’s vastly outperformed the market (the S&P 500 Index, indicated by the ticker GSPC) and Black & Decker grossly underperformed the market. Please take my word; including the effect of dividends, reinvested or not, would not have materially affected the magnitude of the performance difference in these two stocks. As we’ll see, there’s more to beta than meets the eye.

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On Beta (Part 2 of 3)Read More »

If you look up summary data on a given ticker symbol on a broker’s webpage or say, Yahoo! Finance, you’ll encounter various statistics on the price, price ranges, volumes, earnings, outstanding shares, dividends, etc. Here’s a look at the summary data for American States Water [AWR] on Yahoo! Finance, after trading hours on August 9, 2022.

Most of these are either self-explanatory or easily understood with context. There is one item, however, that offers no real clues as to what it is and what it says about the stock you’re looking at: Beta.

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On Beta (Part 1 of 3)Read More »

There has been much discussion over the past few months of whether we’re heading into a recession or are already in a recession. You might be wondering why we don’t know the answer. There is an official definition, but it is subjective in nature. The Business-Cycle Dating Committee of the National Bureau of Economic Research (NBER) officially certifies and dates our business cycles. Their definition: a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” That does leave a bit to the imagination and so economists rely on various indicators.

One common rule of thumb: If the gross domestic product (GDP) declines two quarters in a row, you have a recession. The GDP has fallen two consecutive quarters. But countering that has been the pronounced uptick in our latest jobs report. And there are time lags in the reporting of most economic indicators that adds to the confusion. There is another indicator that economists and investors alike use. It is routinely described as a harbinger in articles and the news, but it is seldom explained why it is used. Those sources typically avoid showing what it looks like. It is the yield curve.

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Yield Curve InversionRead More »

If someone puts their money in an index fund or similarly, a target retirement date fund, they are passive investors. If someone purchases stocks and bonds directly, they’re considered active investors. But people can buy and sell stocks willy-nilly. Maybe because Jim Cramer is hyping a stock. Maybe because they like the product made by a certain company. Perhaps they have FOMO on some new fad. That’s not real investing. That’s more speculative in nature or just trading.

Someone might argue “Hey, Warren Buffett owns Coca-Cola [K], why is it investing if he does it, and speculating if I do it.” Comparing yourself to Buffett huh? Listen, I suppose it isn’t about the stock, but the person. If you bought K because Warren Buffett has it, then you just might be a speculator. Stock ideas come to us from all over and honestly, I’m not judging. Speculation has its place, as does options trading, etc. I enjoy both. There are many approaches to making money in the stock markets, but in every case, one must be a risk manager and exercise some discipline, or the approach will falter over the long haul. Discipline and risk management are a topic for another day. Back to investing: if you really want to be an active investor and feel engaged, you should do at least two things.

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What is Active Investing?Read More »