Portfolio strategy

Investment Analysis Clubs Saul’s Investing Discussions
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When I go to the corner grocer he does not ask me how I made the money I’m using to pay my bills, all he wants is that I pay my bills.

The growth vs. income dichotomy is a false one, one can increase the portfolio by trading and not just stocks but also bonds and options. Further, depending on the size of the portfolio in relation to your spending needs, your strategy can vary favoring fixed income over growth or vice versa. Your tax situation is also important, for example, as a non-resident alien I don’t pay US capital gains taxed but pay a 15% tax on interest and dividends which makes me favor growth and option trading over dividends and other fixed income (aliens resident in other places have a 30% withholding tax on interest and dividends).

Whatever works best for you is best for you!

Denny Schlesinger

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Hi Denny,

I agree. Everyone has a different risk tolerance, tax situation, upcoming expenses (college, house), and life situation (retired vs. 20 more years of income from work).

I think it is great that everyone shares their strategies and philosophies. However, they are not right or wrong. They are just best for that individual. Each investor needs to decide what is best for them and their situations.

Wiseguy

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However, they are not right or wrong. They are just best for that individual.

Agree - but you have to have a benchmark. If my goal is to loose 7% a year then there is little doubt I could achieve that goal, but it is an entirely other thing to beat an index or target fund or whatever. In my experiences, the vast number of retail investors do not know what they are doing, don’t measure returns accurately (thankfully Saul has addressed this), and don’t use benchmarks. Thus, you don’t want to make the mistake in assuming anything they do is ‘right’ for them - they might be doing a terrible job for all you know.

Each investor needs to, ala what Saul is doing, accurately measure their return and decide if the portfolio is doing well due to skill or blind luck (and obviously it can be very hard to tell the difference sometimes), and then they should determine if their method is producing success or not. There are a LOT of poor investors out there, and indexing over time is a very logical alternative.

I’m glad “6” posts here - he likes to apply a dose of reality. Everybody is brilliant in Year 9 of the Great Bull market.

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In my experiences, the vast number of retail investors do not know what they are doing,

Right on. There is a serious lack of appreciation for what a 12% annual return can do compounding over time. The human brain is simply not wired to comprehend the magic of the exponential function.

Making 25% annual returns a target is actually dangerous, as these people will be forced to take on crazy risk and end up under-performing in a big way. It’s gonna be an exercise in frustration, if nothing else.

#6

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Denny,
While I agree with you in theory, I would interject that there are only so many hours in a day and out of those each person needs to carve out how much time they are going to devote investing. Each strategy one might embrace demands time and has a learning curve. I’ve stayed entirely away from bonds because from what little I know about them, I feel the drain on my time to learn how to construct and manage ladders and all the rest is not worth the effort. I can better put the time in on learning more about stock picking.

And even there I must constrain myself. A while back I said I started to get interested in REITs, but as I began to look at them I soon discovered that they bear little resemblance to stocks in companies that make stuff or provide a service. All new measures, jargon, etc. B&W suggested I’m short changing myself by not taking a more active interest in REITs, and he might be right, but I just think the time for me at this juncture is better spent elsewhere. I’m a bit hesitant to invest in banks for much the same reason, but I’ll admit I’ve dabbled very sparingly there and so far it’s been reasonably profitable.

I’ve studied options a bit more and I’ve gained some experience with them, and I still use options to some extent in order to raise money to invest in growth stocks. But they take an inordinate amount of attention (for me anyway) so while I’m in China with 13 hours between me and NYC, I closed most all my contracts before I left the states.

It all takes time. Saul doesn’t invest in bonds, he doesn’t invest in “value” or “income” stocks. Stays away from options, MLPs, REITs, etc. He’s focused on growth stocks. It’s what he knows and he’s done well. Spread yourself too thin and I think you greatly reduce your chances of success with any strategy.

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There is a serious lack of appreciation for what a 12% annual return can do compounding over time. The human brain is simply not wired to comprehend the magic of the exponential function.

this is obvious but in case…Rule of 72. Divide a return into 72 and it tells you how long it will take for the investment will double - so 10% return doubles in 7 years, 20% return 3.6 years, etc. At 12%, you double every six years. The S&P 500 is up about 7% for the past 10 years ending in 1-2017, though most of that gain came in Years 6-10 as you’ve still got 2008 in those numbers.

Making 25% annual returns a target is actually dangerous, as these people will be forced to take on crazy risk and end up under-performing in a big way.

Agree completely. On the flip side, if I wanted to do that (I don’t), picking exclusively in high sales growth stocks would be the way to go, and if you can hitch your wagon to one early on and everything works right then…one or two picks could make all the difference. Plus, there is a LOT of logic to studying these companies anyway and those us who ply a more pedestrian route like me can stand to be exposed every once in a while to far higher risk taking.

I do think there is a general underappreciation for the risks involved in buying these sorts of stocks elusively (in the teeth of a bull market) but I don’t ‘worry’ about Saul like you do - his methodology is very clear and he has a high tolerance for fluctuations. Plus, he is clearly analyzing his picks as businesses first and stocks second.

All this said, I didn’t buy FB on the IPO. I didn’t buy it at $20 either. Too constricted in my thinking - it is too easy to locked into one mode of thinking.

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While I agree with you in theory…

Where, in practice, do you disagree with my advice: “Whatever works best for you is best for you!” I’m not saying do all those things, I’m saying there are all those things out there, pick what you need.

I never traded bonds, I hadn’t even heard about ladders until recently. I used to buy bonds which I held to maturity. When I had an extra $50K I would ask my broker to find me a dollar denominated bond not issued in the USA (for tax purposes) with three to five years to maturity and a high enough interest rate to make it attractive. I would buy the bond (if available) and forget about it until maturity. Talking bonds with my broker took three or four hours per year. I no longer buy bonds.

You say that options are time consuming, yes they are. Anything worth doing is worth doing well. Covered calls are producing for me a yield averaging around 5% to 6%. That’s enough to justify one third of my investing hours. While I don’t time myself, I don’t think I spend that much time on options. Most of my time is dedicated to reading boards, news, and SEC filings.

The time consuming aspect of covered calls is finding the right ones to sell. They have to pass two hurdles, high enough premium (cash up front) and high enough yield if assigned. Every position I own has a spreadsheet and all I have to do is plug in three data for each potential option: expiration date, strike price and premium. Then I eyeball (or sort) the yield and the cash columns to pick the right one. I either let the option expire or I buy it back if I have earned enough of the premium already (around 65% or less if a short turnaround). Another spreadsheet with daily quotes downloaded for Yahoo tells me if it is time to buy back. Since I have a very concentrated portfolio, I’m messing with six or seven stock symbols at most at any time. Once one trades options long enough, one gets to know them, how they behave, quite well, which reduces the time spent on them.

I suspect that if I were still gainfully employed I would not be doing covered calls but since I’m 100% retired from gainful employment, I’m gainfully spending time on my portfolio, my sole source of income. :wink:

Denny Schlesinger

BTW, these days I use the ladder mostly to change crappy Chinese lightbulbs that burn out way too often. You can’t find quality lightbulbs in Socialist Venezuela.

BTW2, do you know the value of a burnt out lightbulb in the now defunct Soviet Union? Since lightbulbs were hard to find and expensive to boot, when a bulb burnt out at home, the comrades would steal one from the office and to hide the crime they had to replace it with the burnt out one from home.

BTW3, last year there was a shortage of lightbulbs in the marina where I had my beach condo. The one above my entrance door burnt out. Guess how I fixed the problem (for a hint, read BTW2)

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