This week was very dull for the stock market and very spicy for this blog.
August was clearly a good month for stocks which I did not expect would be the case. I thought it would be worthwhile to revisit the position I put on in the double short ETF (SDS). I bought on July 14 at around $74 per share. It closed Friday at $$66.76. Since July 14 the S&P 500 is up 6%. Interesting that SDS is down 9.7% which is not horrible in that I expected tracking errors when I bought it.
When I put the position on I wrote that if I was wrong (which for now has been the case) and the market went up that SDS would become less and less of a drag. I bought it to about 4% of the portfolio, today it is down to 3.2% of the portfolio. No doubt it has been a drag on returns but I was clear that for the time being I would be OK with capturing a only a portion of any upside-which I have done.
I think this is a good example of how we (by we I mean me and anyone reading this blog) will not be right all the time and the way in which we implement changes will determine the consequences of being wrong. Of course for all anyone knows September could be dreadful and then I seem smart which won't be the right way to look at it.
Changing subjects I had a comment in response to disclosing owning Plum Creek Timber (PCL) to capture lumber and low correlation to the stock market. The reader noted some analysis that says the stock is unlikely to do much in the next twelve months. The analysis cited could be correct time will tell but the bigger theme is the role that all holdings play.
PCL has been in the mid-$30's the vast majority of the time I have held it. It pays a high yield and does not move (for the most part). This is exactly what I want it to do. I have other holdings that yield a lot and don't move. Other names do move. Things like industrials, energy, a couple of consumer names and a few other places is where I expect most of the growth to come from.
The utilities, the other more traditional REIT I own and a few other things I hope will be steady and dividend paying. One thing I think I do well is blend together stocks that do different things in such a way that the overall portfolio is usually very predictable. The anecdote mentioned above might be an example of what I mean.
If I am accurately assessing this, I am able to accomplish this with something I have talked about many times which is watching how stocks react to all sorts of different news to learn what the stock is capable of. I don't think learning the fundamentals alone is enough.
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7 comments:
Roger - do you know of an investor friendly way to invest in Vietnam? I really like Vietnam as an opportunity with its move towards privatization, high GDP and the World Trade Organization membership later this year.
-- Faisal Laljee
http://stocksandblogs.com
Many investors like the adrenalin rush of the quick kill.Yet research shows, I believe, that income investments really need to be in practically all permanent portfolios.I think Plum Creek Timber is a nice income stock with interesting growth potential. I addressed income for the permanent portfolio in my 9/1 blog.No one reads it, so it is for my own amusement for now.
Kudos again for your emphasis on portfolio managment, process,etc.
Two questions. For income, do you have a goal as to how much, i.e. % yield, you want relative to your entire portfolio? (Tom...I'm interested. Where's your blog?)
Second question/issue. For hedging, the four percent allocation to leveraged hedge, if you don't mind sharing, what exactly was the drag on your total return ytd? Perhaps more relevant to me, what would have been the equivalent drag if instead of going short with 4%, you had reduced exposure and went into cash?Said differently, what would the equivalent have been in % of cash allocation? I'm trying to weigh pros/cons of short etf vs cash.By the way, the apparent shortfall in the double leverage short etf worked in your favor in this time period. Great real time disclosure about how a double etf short is not an exact science.
Many questions, cool.
I wrote an article for TSCM about Vietnam. I own a few shares (along with just a few clients) of Vietnam Opportunity Fund (VTOPF). This fund invest is in Vietnam through various ways not just the stock market which it tiny. Vietnam being an island (metaphorically) the fund does not really correlate with emerging markets-the asset class. It trades in London, in US dollars. At Schwab, the order needed to be called in.
T, live a link to your blog. Your comments are often interesting so I imagine your blog is pretty good too?
The drag of SDS (not an exact number) is around .04%. The opportunity cost by not being in the money market when added to the drag is almost nothing.
For fixed income I don't really target a yield because yields today will be different than five years form now. I try to capture many different types of bond market exposure. When treasuries yielded 3% I was not that interested. As two year yields went above 4% and 5% I added more for clients that needed the fixed income exposure. I also have foreign and convertible exposure throguh CEFs, individual preferred stocks, inflation protection exposure. I don't have much in the way of high yield exposure as spreads are historically narrw.
Roger bear with me on some follow up questions. I realize there was very little opporunity lost on not being on the MM when only 4%(sds) of the portfolio is used to dampen a downturn in the mkt. What I'm trying to get perspective on is how much more cash would need to be allocated if you had used MM and not sds? To reduce the impact of a down mkt, one could go to either a short strategy or to mm(money mkt). For your 4% of sds what would be needed in cash allocation without the sds? (Hope this is clear.)My guess is that 4% of sds would have the same impact on your portfolio as 12% incrase in MM. Just a guess. If this is an apples and oranges comparison, let me know..and why would help (tolearn is only why Iask).I'm personally more comfortable with an increase incash, but this is largely from inexperience using a short.
And, regarding income yield, if your model portfolio had a designated total yield in today's interest envirnoment, what would it be?..much like looking up the total yield on a cef. This would give me some perspective on what emphasis a top down diversified money mgr, like yourself, would place on income as a part of diversified portfolio. I realize that some clients are going to want more income. I like how you spread your effort across different streams of yield. Much interested in how a diy'er would gather information on this. Eager to know more about this area. Easy to find stocks/cefs/etfs with yield, harder to know where the capital and dividend is safe. Thanks.
Roger-
You stated; “I own lumber, through Plum Creek Timber (PCL), for the correlation aspect as well.”
Both my comment and anonymous replied with a polite - huh? Your statemet was taken to mean that PCL was not strictly a steady yield stock but also a timber commodity play. Now you have clarified that PCL is a yield investment. With this we agree. Our previous understanding was otherwise. Obviously there are better ways to get exposure to timber as a pure commodity investment to which you seem to agree with as well. I’m glad we cleared this up!
Disclosure: This comment was written by a CrossProfit analyst and may not reflect the opinion of CrossProfit.com. http://www.crossprofit.com
Roger -- which REITs do you use? There are a LOT of them out there, and I am curious how you picked the ones your using.
Thanks,
- Ryan
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