Diversification

One goal of a portfolio is for it to be “diversified”.  In layman’s terms that means that the stocks are from different industries, in different countries, or otherwise significantly different from one another.  The thinking is that trends that impact one stock, for better or worse, won’t hit all the stocks in your portfolio, so losses in a subset of your shares won’t have a significant impact on all of your other stocks.

 

diversification

Unfortunately, however, stocks often exhibit high “correlation” with one another, meaning that even though the stocks are from different countries and in different industries, they all move the same direction.  This is great when the trends are in your favor (a rising tide lifts all boats) but is hard to swallow when every single stock in your portfolio declines at the same time.  Today was a bad day for stocks but it was amazing that all 18 stocks in Portfolio one had declines and not a single one “bucked the trend”.  It is true that they all move to different degrees, with some just a “bit” in the red and some losing 2-3% on a single day.  In fact every stock except for one single Japanese stock across all 6 portfolios dropped today, which is almost perfect correlation (heading the wrong way, though).

According to news reports, Apple had a bad report, and there was some other economic news, and everything fell and kept falling.  We have bad days like this, and we also have good days when everything rises, too.

Ideally, however, if you have diversified stocks you hope to move up in a good way, with some rising a lot, some a little, and some falling.  But some days are just bad.

Sign of a New Peak for Stocks?

Back in the woeful years of the dot.com boom and bust I worked for a company with a dubious distinction. The value of that company in the stock market was less than the value of the cash we had on our books. What the market was essentially saying is that the sum total of all our efforts as employees was NEGATIVE – we would be worth more if we just shut down immediately and gave back the cash to investors. The fate of that company, of course, was to go bankrupt.

Today there are some other major signs of froth in the market. Yahoo is a classic web / advertising / technology stock with a solid market capitalization of $40 billion. Yahoo’s CEO, Marissa Mayer, was a Google alumni and has been receiving a lot of press for her intelligence and drive to change the company, as well as her good looks.

Screen Shot 2014-09-20 at 8.43.59 AMHowever, all is not as it seems.  The primary value for Yahoo isn’t its online advertising, email, or users – it is the stakes that they amassed in the hot Chinese e commerce company Alibaba (NYSE: BABA) and also Yahoo Japan.  In fact, the value of Yahoo is less than the value of these stakes, which are approximately $45B, partially due to the reason listed in this Bloomberg article:

While the market value is large for Yahoo’s Asian assets, that doesn’t necessarily reflect the value available to investors and the company because of taxes, said Ben Schachter, an analyst at Macquarie Securities USA Inc. Yahoo, which would have made $8.3 billion by selling Alibaba shares at the IPO, only reaped around $5.1 billion after taxes.

Taxes are ‘‘one of the big issues,” Schachter said.

While it is true that $45B in investment value isn’t worth $45B because of the after-tax implications, it certainly implies that the market isn’t valuing Yahoo at very much at all.  It is also possible that the market thinks that Alibaba is over-valued at its current price of near $100 (after a huge run-up from its IPO price of $68, another huge sign of froth in the market) but the two stocks will generally track closely together now.  Yahoo is sort of a broken “tracking stock” for this value.

Another sign of froth is “spec companies”.  Spec companies are stocks of companies that are created “from scratch” and their value is based on the promise of management to do certain things in the future with money contributed or raised from investors.  Generally you can’t create a spec company – you need to take over an existing listing and then you promise returns to investors who in turn value your company.  Brazil was on a tear earlier in the decade and a flamboyant billionaire created a company OSX whose IPO in 2010 was discussed here:

(Reuters) – OSX Brasil (OSXB3.SA) slashed its initial public offering as investors balked at paying a high price for a start-up company with no revenue.

This too recently came to an end as the company OSX filed for bankruptcy protection, but the ability of a firm to launch a start up planning to build a port and various oil and other assets and receive a high valuation should raise eyebrows.  Like many other similar plans this one ends up in dust with a recent bankruptcy filing.

I don’t have any sort of unique forward looking view on stocks but the eye-popping valuation and initial one-day jump of Alibaba and other signs have been correlated with declines in the stock market in the past.

Cross posted at Chicago Boyz

Using Google Finance To Track Portfolio Performance

I created an account in Google Finance to allow the beneficiaries to see how their stocks are performing and get an integrated view of news on their stocks.  It includes the purchase price for each of the stocks so that it shows gains or losses overall as well as gains in the current day.

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This is the view of the “apps” under google and the green Finance one on the lower right brings up this application.  You need to sign in with a name and password (which you can then save) in order to reach it.

Here is a view of Portfolio 5 with a view of the stocks.  you can see the name, ticker symbol, last price, shares, cost basis, today’s return, and overall return.  This is under the “performance” tab.  You can also see news for the portfolio below; this is useful because if there is a major story that is impacting the price of your stock you can just go into the story directly from this page.

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Another useful view is the “fundamentals” view.  This view shows the market cap (value of all the outstanding stock), the 52 week high and low stock price, EPS or “earnings per share”, and the P/E ratio which is the price to earnings ratio.  Beta is an indication of risk vs. the market.

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Hopefully this allows for the beneficiaries to watch their portfolios and learn about their stocks.

 

Portfolio Six Updated August, 2014

Portfolio Six is three years old.  The beneficiary contributed $1000 and the trustee contributed $2000 for a total of $3000.  The current value of the portfolio is $3560, for a gain of $560 or 18%, which works out to about 12% / year.  The details can be found in the link on the right or go here.

The portfolio is doing well.  We sold Yandex the Russian search engine at the start of the Russian invasion of Ukraine.  There are four stocks in the portfolio and we plan to add two more this year.

Portfolio Five Updated August, 2014

Portfolio Five is 5 years old, with the beneficiary contributing $2500 and the trustee $5000 for a total of $7500.  The current value of the portfolio is $9352 for a gain of $1852 or 25%, at an annual rate of 7.4% / year.  You can see the detailed portfolio in the links on the right or go here.

Strong performers include the Australian Bank Westpac and Sasol the African energy company.  There are 9 stocks in the portfolio and we plan to add 2 more this year to get past 10 which helps us with diversification so that if one stock falls a lot the whole portfolio won’t be significantly impacted.

 

Portfolio Four Updated August, 2014

Portfolio four is five years old, with the beneficiary contributing $2500 and the trustee $5000, for a total of $7500.  The current value is $10,330, for a gain of $2830 or 37%, which is about 10.9% / year adjusted for the timing of cash flows.  You can see the detail in the link to the right or here.

Portfolio four overall is doing well.  There are 10 stocks in the portfolio and we plan to add two more this year.  Big gainers are Westpac, the Australian bank, aided by currency moves (see post below) and Garmin.

Portfolio Three Updated August, 2014

Portfolio Three is our third oldest portfolio, at seven years old.  The beneficiary contributed $3,500 and the trustee $7,000 for a total of $10,500.  The current value of the portfolio is $13,472 for a gain of $2,972 or 28%, or 6.2% over the life of the fund.  Click on the link to the right or here for details.

The portfolio has 8 stocks and is doing well.  We sold Splunk for a gain and Cliffs for a small loss when they hit our stop loss mark earlier this year.  Our current portfolio is reasonably well balanced and the stocks are doing well.  We have $2713 in cash and if we add $1500 this year between the beneficiary and trustee we will have $4213 to invest in stocks, which will allow us to add three more and continue to diversify the portfolio.  Portfolios of over 10 stocks (that are all different) are considered reasonably diversified and we need to add a few more to reach that target.  We will also need to add a couple more over the upcoming years because a few of the stocks (the Canadian banks) are closely correlated.

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