Saturday, December 31, 2011

December 31, 2011 That's Life

Fw: Risk/Reward Vol. 99

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN

"That's life/That's what all the people say
You're riding high in April/Shot down in May"--Lyrics from "That's Life" sung by Frank Sinatra

"Mr. In-Between, Mr. In-Between/Pickin's mighty lean, Mr. In-Between
I feel like a sailboat kept in a bottle/I feel like an engineer that can't find the throttle"---Lyrics from "Call Me Mr. In-Between" by Burl Ives

"Anti-wrinkle cream there may be, but anti-fat bastard cream, there is not."--Quote from the movie "The Full Monty"

"Neither a borrower nor a lender be. For loan oft loses both itself and friend. As borrowing dulls the edge of husbandry."---from " Hamlet", Act I Scene III

"A banker is a fellow who lends his umbrella when the sun is shining and wants it back the minute it begins to rain."---Mark Twain

Happy New Year, dear Readers. My hope is that 2012 brings you wealth and wisdom, but most of all good health.

For all of my work, my study, my risk taking---I netted only a 3.5% gain on my holdings for the year. I started out very well, but we all "got shot down" in late July when Congress decided to run the risk of default, an event that didn't occur but which focused attention on sovereign debt across the pond. But for a few false starts thereafter, I have been out of the market since July 29th, when the Dow was at 12,300--near where it is today. In the interim, I missed a lot of roller coaster activity and more than 3% of gain from dividend payments. Oh well, I also avoided the risk of a sub 11,000 Dow which looked realistic just a few weeks ago, and remember that at no time was I less than 25% in cash.

So, what have I learned?

First, I learned that I cannot support my profligate life style on a 3.5% return. Accordingly, I am thankful that I kept my day job. I need to improve my investing skills--- or keep adding to principal.

Second, I need more conviction. I am not rethinking my exit in July--it was well timed and justified. But, I do regret bailing on the investments I made on August 9th. That day I deployed about 25% of my capital and repurchased a host of excellent stocks (tobacco, utilities, oil, telco's, etc.) that had been unfairly battered by the early August panic. In the succeeding days of incredible volatility, I sold everything again even though most of my re-acquired holdings never approached my 8% loss limit. Had I held the throttle steady, my net return for 2011 would have been double.

Third, I need to be more discerning. Going into this year, all but my 25% cash position (and a small amount in tech stocks) was invested in a beautiful, "widow and orphan" portfolio--full of the common stock of utilities, tobacco, telco, oil companies and the preferred stock of financials (bank and insurance companies). When the sovereign default and banking crises arose in July, I sold everything without appreciating that what happens in the world of financials may jolt the market, but in the long run is not going to impact how much electricity Duke Power sells or how many cigarettes teen agers smoke. Not all my sailboats were in a bottle and "my pickin" was not nearly as lean as I feared. I was not (Mr.) In-Between a rock and a hard place. I owned some great stocks worthy of keeping, and I did not.

Fourth, I need to appreciate that although world events (i.e. the European debt crisis) do impact our stock markets, those events are not the only factors to be considered. United States companies currently have extremely healthy balance sheets, very high productivity, excellent managers and world class franchises. As a consequence, McDonalds, CocaCola, Johnson & Johnson, Yum Brands, Apple, Caterpillar etc, are positioned to grow here and abroad for years to come, and should not be abandoned for any substantial period of time simply because Greece can't repay its debt

Oh, don't get me wrong. I am not upset with myself. (Shockingly, neither Barb nor I can ever remember me being so). But I do want to learn from the 20-20 vision that hindsight affords.

Speaking of Europe, things still don't look too rosy. Italy--which has acted like a "fat bastard" for years--had a disappointing 10 year bond auction on Thursday finding fewer buyers than desired and having to pay nearly 7% in yield. This led Italy's prime minister, Mario ("The Full") Monti, to implore his European neighbors to enlarge the pool of Euros available to borrow cheaply from the European Financial Stablity Fund (EFSF) so that Italy can be spared from high interest rates as it refinances over 400billion Euros of debt in 2012. I suspect we will continue to experience Euro related volatility for some time to come.

So what are my first moves in 2012?

I plan to slowly repurchase a variety of utilities, tobacco and domestic oil plays on dips, and hopefully I will have the conviction to keep them unless and until they hit my 8% loss limit.

I also plan to buy some financials---yes, I said financials--everyone's ugly ducklings. As I admitted above, I am guilty of a lack of discernment, but I suggest the market has been as well, at least when it comes to financial stocks. For example, I fail to see the type of peril that has the preferred stock of HSBC trading below par ($25) and yielding more than 6.5% despite it being rated A or better by all rating agencies. HSBC is a well respected world bank which, as its name implies, has roots not only in London, its headquarters, but in Hong Kong and Shanghai as well. Moreover, keep in mind that the preferred dividend must be paid before the very healthy common dividend (4.9%) can be distributed, a fact that provides a substantial amount of security--at least to me.

As another example, does anyone believe that what happens in Europe will unduly impact the business of Associated Bank of Wisconsin which has now repaid all of its TARP money, which has shored up its balance sheet and which pays a healthy 8% dividend on its recently issued trust preferred shares?

In addition, do you really think that Aegon, the American/Dutch insurance company (here known as Transamerica) will not pay the dividend on its preferred shares (now yielding an outsized 8+%) having done so throughout the entirety of the 2008-2009 financial crisis, especially in light of the fact that it has fully repaid the Dutch government for the aid received during that crisis, has announced an intent to reinstitute a common stock dividend and has reduced its total exposure to the PIIGS to less than 4% of its assets?

The simple fact is that from before the time Jesus cleansed the Temple, to the time of Shakespeare, to the time of Mark Twain , to the time of Barack Obama, most people simply hate banks and bankers. That said, you might as well hate apple pie and motherhood, too, because you cannot exist without any of them. Banks make the world go 'round. When was the last time you bought anything on line--or anywhere else for that matter---using cash? From debit cards, to credit cards, to lines of credit, to working capital revolvers---from the most modest individual to the greatest commercial enterprise--all of us are dependent upon banks. When they are run responsibly, they provide the kind of steady income I desire.

So as 2012 dawns, I draw inspiration from Ol' Blue Eyes who crooned:

"I've been up and down and over and out/And I know one thing
Each time I find myself flat on my face/ I just pick myself up and get back in the race
That's life..."

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