Yesterday a guy named Bryan Perry was on CNBC to promote the book pictured here.He brought several picks with him as examples of what the book is about; a combo of double digit yields and solid price appreciation;
Apollo Investment (AINV) 20.8
Diana Shipping (DSX) 28.9
Deerfield Triarc (DFR) 19.0
Advent Claymore G&I Fund (LCM) 22.4
S&P 500 Covered Call Fund (BEP) 18.4
I am a big fan of the concept of big total return that relies on a big dividend, I think it has a place in any diversified portfolio.
There are risks inherent in these types of high yielders and owning too much could become a big problem and while I am hopeful the risks are touched on in the book, time constraints of the TV segment did not get around to the risks.
The numbers next to each ticker symbol above are the respective standard deviations of each holding, according to PortfolioScience. The number for the S&P 500 is 10.4 so if PortfolioScience is correct the five examples could cause a wild ride. There is nothing wrong with this kind of volatility in and of itself but only so much is right for a given portfolio. If those five names accounted for 10-15% of a portfolio I'd say probably not a big deal.
This chart plots all five picks against the S&P 500 and it is easy to see that the stocks are generally more volatile than SPX and the hit to a couple of them during last week's selloff was quite pronounced.I should disclose that although I am citing standard deviation numbers from PortfolioScience it does not appear from the chart the the numbers for BEP and LCM could be correct. Actual numbers are handy but it doesn't hurt to eyeball a chart too.
A big thank you to Adam Warner and his Tivo for this post. I had a spastic movement involving the remote and Adam was able to retrieve the author's name and two of the picks that I could not remember.
16 comments:
Roger,
Could you comment abut a systemic risk that I have not seen mentioned lately.
That risk is (our) government intervention. I e-mailed both senators from Indiana last year about credit card rates that were being charged by some of the national banks (Chase,Citibank). I got responses by both (I was amazed!). S.Lugar responded by saying that those rates should be determined by the marketplace, that the federal gov had no business getting involved. S.Bayt's office responded by saying that they were planning hearings about that very thing. Both were true to their word. Now if the house and the senate both decide to reregulate banking lending practices for subprime borrowers or lenders, what would happen? I think I know your answer, In the light of NEW and other subprime lenders could you expound about the unintended consequences of more regulations in the banking sector. Tom in Indy
Tom,
Let me think on that a spell so I can come up with more that a two word response. I will try to post something over the weekend. Thanks Tom.
IMHO the main systemic risk associated w/ govt is the growing national debt caused by increased govt spending rather than re-regulation of an industry that went overboard: The former increases the cost of money, something very difficult to work around which can actively suppress entrepreneurship, whereas the latter just means dotting some more i's and crossing a few more t's while looking for the right angle to make a good profit.
The cycle will begin anew as it always does but if global imbalances and our debt, including the "off-the-book" kind from war making, is not dealt with that cycle will not be a lively one never mind what the regulations are.
roger...nice find....i rarely order books promoted but will give this a try...income is lacking in my port. from reading what's at amazon looks like a blend of sector rotation and high income. is this a fair appraisal? does perry's style require intermediate trading or closer to long term buy and hold? No free lunch does come to mind, though.
Roger, lining up the S&P500 Dividend ETF (SDY) against the S&P500 Covered Call Fund (BEP) as 'exemplars' it looks like the growth rates are comparable w/ BEP slightly more volatile but the yield on BEP looks much better; i.e., total return for the covered call strategy appears superior to the dividend achiever strategy in the case of US large caps. Is that what you see?
RW the thing I would add is that CEFs do expose holders to swings in premium/discount. Every once in a while this comes in to play for CEFs and BEP has been no exception. Point being holders are susceptible to fear and greed of others more so than with ETFs.
To the 818 anon, my point in posting was more about caution and moderation than an endorsement of the book. I have not read the book so can't really comment.
Ah, see your point Roger. It may be that CEF's oriented to large caps don't suffer from big premium/discount swings as much as some other CEFs but that additional source of deviation could certainly work against total return over time.
I'll investigate this a bit further. I've been thinking about better (not necessarily best) ways to augment yield these days, particularly in light of the troubled MBS sector where prices continue to slacken as investor timbers shiver from here to Monte Carlo (where European investors at the Citi conference have apparently discovered that those AAA rated CDO's they bought have a lot more subprime in them than they realized). Think MBS products could become a real bargain in time but right now they trouble me.
In that regard I closed out most of my short NEW position today but since I'm playing with house money now will leave some on the table to see what happens: The rumored Morgan Stanley buyout might lead to something interesting but its' a reasonable guess the common stock price will go to zero regardless. All this is in my tactical portfolio of course; much smaller than my strategic portfolio but it's good to add some alpha when I can as the latter's contents are fairly pedestrian (and performance hasn't been that stellar lately either).
RW, one idea that could be interesting is some sort of dividend ETF/covered call CEF combo.
whatever dollars one might put in the ETF could instead go 80% ETF/20% CEF.
Assuming 10% yield for the CEF (maybe a stretch but the math is easier) it could be looked at as adding 140 basis points to the ETF yield without being overly exposed to CEF squirreliness.
That's a good thought: Shouldn't be too hard to set up a matrix of different ETF/CEF combos to see if there was a sweet spot (more likely a range) where total return was maximized w/ volatility minimized. Might be worthwhile looking at other pair possibilities too, a big-cap covered call CEF w/ a mid-cap dividend ETF (or vice versa) for example. Wish I had more time for this stuff -- my 'day job' looks like it could start getting busy again soon -- but I'll see how far I can get w/ this anyway.
rw: How do you go about looking at volatility for a group of positions? Any suggestions of process?
my first post:
re the discussion of ETF/CEF combos:
surely this is the basis for another ETF offering. No, wait, it should be a CEF.
No, a tandem ETF/CEF:
the .... ETF/CEF Combo Income Strategy Fund(s), with options! and a book!
PH
...or just an attempt to answer someone's question.
I did a book review of this book:
http://valueblogreview.blogspot.com/2007/01/book-review-25-cash-machine-double.html
for those interested in it.
You can also find all my reviews here:
http://valueblogreviewbooks.blogspot.com/
Anon 10:40, haven't thought much about setting this up yet but my first instinct would be to try and save time by using Morningstar tools (probably start with the portfolio allocator) or something comparable.
'Quick and dirty on the first pass' is usually my process because it helps me get a better sense of what is possible and, surprisingly often, close enough proves good enough; not much point in pursuing precision, accuracy tends to be far more important anyway.
If the first pass is unsatisfactory for some reason I'd have to give this more thought as blending statistics can be tricky; or at least is readily prone to error when I start fooling with it ;-/
Roger .. Great discussion. I agree that total return is an important factor in ones portfolio strategy. With that said, I ran these five stock picks through my system which I call Rocket Science Investing (RSI). Three AINV, DFR, LCM scored at the bottom (zero out of 16) while DSX got 4 and BEP was at 7. My conclusion is from a stock price and volume consideration I wouldn't buy them. For more information on RSI and ETF recommendations you can find them on my blog at http://rocketscienceinvesting.blogspot.com/
Thanks for your forum … Marlowe
I'm usually not a fan of Gehry's work, but this is an exception. Using wood as a wrapper imitating structure is not only novel, but ties the space down through the use of a consistent, inviting, and non-distracting material palette. Perhaps Gehry is more suited to small-scale projects Laptop battery.
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