A New Beginning

A New Beginning

I have been thinking a lot about the performance of my portfolio over the past several years.  It frankly has not been as good as I'd like.  Why is that?

First, to be perfectly clear, the problem is not magic formula investing.  My two approaches (Formula and Select) have both out-performed the benchmarks since I began them.

I think they do well as I have a plan.  An approach.  Frankly, I am the problem - when I deviate from a plan.  It is so easy to panic.  It is so easy to buy too much of a risky stock,  focusing more on potential gains than potential losses.  It is easy to buy "undervalued" stocks/securities, which frankly often have no catalysts in sight.

Then another problem, which I discussed often, is that securities that are largely like bonds or are actual bonds are just flat out going to struggle (in my view) for the foreseeable future.  We have had a 35 year bull market in bonds... we are due for a prolonged bear market (which seems to be starting).  An investment guy I follow put it best - you're better off 80% in equities and 20% in cash than 60% equities and 40% bonds.

Principles

So I think I need a set of principles going forward. 

1. Continue to grow $ I put in MFI approaches.  These are working and it is an area I know well.
2. Sell everything that is bond like.  This does not have to be done in panic mode, but as securities reach an attractive price, sell them.  This includes closed end funds, REITs, preferred stocks and utilities.
3. Sell stocks that are "cheap" but have no catalyst (I am looking at you KCLI).
4. Outside of MFI, focus on areas that have some pricing power and growth potential.  
5. Purchases outside of MFI have to largely be for longer term (one year +) and they need to be firms that have clear upside, ie catalysts exist.
6. Limit picks that are lottery tickets (like biotech plays). It is frustrating to see a SRPT, which I owned at $45 shoot to $150.  I want to stick with the next one, but it can be pretty elusive and I have no expertise in this area at all.
7. Start to sell puts more often, instead of out and out buying a stock.  This can generate some income I am forgoing by moving away from bond-like securities.

Selling stock positions is emotionally difficult for me.  (1) I am admitting (often) I made a mistake and (2) I am afraid that what I sell will then shoot up the week after I sell. So I will move towards just two categories: MFI and Non-MFI.  With the idea of 50% in each.  Non-MFI will start out with sector-focused categories like I did with Gold and Small Banks.  I think my three primary sectors will be (1) energy, (2) shipping and (3) small banks/financials.  Then, no more than 10% overall in speculative positions like biotechs.

Russell 3000 Plays

Readers may recall that I started a portfolio of about 20 stocks that I thought would be added to Russell 3000 in their reconstitution. Here are the 20 stocks and how they did:

Stock	Start Price	Current Price	Change
acfc	10.80	10.90	0.9%
agle	10.43	10.72	2.8%
aoi	18.67	16.30	-12.7%
aubn	44.00	50.70	15.2%
brt	12.56	12.95	3.1%
cool	26.46	38.73	46.4%
dwsn	7.38	7.84	6.2%
fccy	21.38	21.95	2.7%
fcel	1.93	1.45	-24.7%
fraf	35.90	34.55	-3.8%
gdp	13.99	12.88	-7.9%
hbio	4.81	5.20	8.1%
ovly	20.80	23.30	12.0%
pfsw	9.95	10.25	3.0%
spne	11.95	12.99	8.7%
srra	2.38	3.30	38.8%
synl	18.35	20.75	13.1%
tess	18.32	16.70	-8.8%
tmq	1.29	1.76	36.7%
zfgn	6.61	7.09	7.3%
Total			7.4%

I am in the process of selling them all. Ironically, some of the ones that did the best (SRRA and TMQ) were not new additions to Russell 3000.  So at the end, I do not think I'll repeat this next year (even though it did well).

My other Russell 3000 play was FUNC.  It has never gotten the hoped for pop.  I have sold about 35% of my shares (at a solid profit).  I will sell most of remaining shares, but will roll some FUNC into my small bank portfolio.  I still think they are attractive takeover target.

Selling Puts

I have sold several cash-secured puts.  I don't want to go overboard as in a market correction these would not be much fun.

 

Ticker	Put Date	Strike price	premium	# Puts	Current Shr price	Income	Current Put
SPWR	September	$8.00	$1.70	26.00	$8.23	4,420	$1.16
FSLR	August	$50.00	$2.80	10.00	$52.65	2,800	$2.49
SPWR	July	$8.00	$1.40	26.00	$8.23	3,640	$0.55
OMER	July	$16.00	$0.95	30.00	$18.67	2,850	$0.50
PXD	August	$195.00	$10.90	3.00	$185.65	3,270	$14.50
PXD	August	$195.00	$14.89	3.00	$185.65	4,467	$14.50

So for those not familiar with Puts (and I am learning by doing), looking at the first row: I sold 26 SPWR puts that expire third week in September.  Now puts are expressed in bundles of 100, so 26 puts means 2,600 shares.  In selling the puts, I have agreed to buy 2600 shares of SPWR at $8.00 a share on September 21st.  For that promise, I was paid $1.70 a share, which equals income to me of $4,420.

If SPWR is under $8 on 9/21, the shares will be "put" to me at $8.00 apiece.  As I have already been paid $1.70, the price has to be $8.00 - $1.70 = $6.30 for me to realize a loss.  SPWR has gone up since I sold the puts and the current price columns shows that the current price of those puts has dropped from $1.70 to $1.16.

Now if SPWR stays over $8.00 (at $8.23 on Friday), I just keep my premium.  You might think, "that sounds great".  And it is best outcome for me.  But, I might have been even better off just out and out buying the 2,600 shares instead of selling the puts.  Obviously you want to sell puts on stocks you think are undervalued and stocks you are willing to own.  So if SPWR is at $7.50 on 9/21, I will enter a transaction in my tracking showing my basis is $6.30, I I bought 2600 shares and the current price is $7.50.  If it is over $8 on 9/21, I would just add the premium of 4,420 to my cash position.

These 6 open positions represent the most I want to allocate at any one point in time to puts.  I will not open new put positions until an open position closes.  You can see these sum to $21,000, so if I could just do this successfully 4 times a year, it would be real money. In reality, it would be unlikely to net that full $21,000 though, I suspect typically half the positions will get put to me and I'll erode some of the premium.  In a correction (say an overall drop of market of 10%), I'd probably get put on all 6 positions with several if not all at out and out losses.  That is why I am making these cash secured - meaning I have enough cash to own all the positions (without using margin) in event market goes south quickly.