Stock Selections for 2014 and Diversification

Every year we select stocks right about the time when the summer ends and the kids go back to high school or college.  Doing this at the end of the summer gives them time to earn their $500 for the match and sets up a consistent annual pattern for how we make incremental investments.

Due to Stop Loss orders and other sales there is additional money that we need to put back into more stocks.  Many of the beneficiaries will have to make more selections.

Diversification and the Number of Stocks in Each Portfolio

As the portfolios get bigger, we also try to pick fewer stocks and put more money into each individual stock.  As a rule of thumb you have a “diversified” portfolio if you have about ten or so stocks equally weighted.  This only applies if the stocks themselves are diversified, however, across industries and countries.  Since most of the portfolios have stocks concentrated in a few sectors or countries, my “rule of thumb” is to try to go up to 15-20 stocks to get additional diversification.  At that point if we are buying newer stocks, I will recommend making larger single purchases and we can bring up the average value of stocks in the portfolio.

For example, Portfolio one, which has been growing for almost 13 years, has 17 stocks and about $34,000, with $2000 cash on hand.  Thus of the $32,000 invested in stocks, the “average” balance would be just under $2000 per stock.  While that is true, we still have a few closer to the $1200 mark and some that are larger than $2000.  New purchases will be made in excess of $1500 and as there are sales we will try to keep the portfolio at 20 or less stocks, and even 15 or so is probably about right.

Portfolio Two is also at a level where we have begun consolidating and buying in larger blocks, with 15 stocks, $22,000 invested in stocks, and about $3000 in cash.  Going forward we will also be buying in larger lots of $1500 / each and consolidating through stop loss orders and the like.

The other portfolios, three through six, are still at a level where it makes sense to make smaller purchases to get beyond the 10 or so stocks in the portfolio so that if there is a big drop in a single stock it won’t totally dent the portfolio.

Stock Selection for 2014 – Where to Look?

I follow the markets in general due to my line of work in finance and am aware of most sector trends.  I have some knowledge of foreign markets and macro economic trends but less so the further you move away from the USA.

I use Google stock screeners to look for stocks in the US and abroad, by looking at stocks with certain market caps (above $1B) and with other characteristics like price performance and dividend yield.  Much of the time I am looking for negative performance (i.e. stocks that have declined 0 – 25% over the last 12 months) because I believe that some portion of the portfolio should be tied to “regression to the mean” (i.e. what’s down comes back up) and some on growth stocks.

For foreign stocks I look at those that trade ADR’s in the US, generally on the bigger exchanges (NYSE or NASDAQ).  I usually don’t buy ADR’s on the “pink sheets” or OTC markets, although Siemens recently moved away from US accounting and consequently was de-listed from NYSE and picked up on the OTC markets, so I ended up buying one, anyways.  I don’t think it will trade that much differently than on NYSE but this is something to watch.

I have a lot of friends in the markets and ask them about stocks or types of areas that they find interesting.  Sometimes they laugh at me and tell me everything is overvalued but I usually can get some good ideas.

Barrons and some of the online sources also have interesting information, although I would never just buy something based on a single article.  No one should just buy based on something that they’ve seen on the Internet or based on a “tip”.

The standard boiler-plate warning is to “read the financials”.  This is true, although slogging through 10-k and annual reports with footnotes can be mind numbing.  They have to make so many disclosures of potential risks and there are reams of footnotes and much of this doesn’t directly impact the stock price.  On the other hand, I will look at their power point presentations available that the company makes to investors on quarterly calls or conferences where the company actually tries to explain “in english” what their strategies are and why their company is strong (which indirectly goes to valuation).  I also will look at various analyst reports on stocks, although once again this is more about sentiment in the market than any particular insight since those reports are often notoriously un-correlated with investor success.

In the end I thing through all this information, pick a bunch of stocks to watch for a while, and then cull this down to my list.  Sometimes I even re-recommend stocks’ I’ve previously had on the list, since many of the beneficiaries don’t pick them (if there are 8 stocks on the list often they only take 2).

Valuation

Valuation is difficult right now with the markets hitting new highs.  For an individual, I wouldn’t recommend putting all of your money into stocks (especially individual stocks) like I do in this portfolio.  However, this money is different than a standard “nest egg” in that it is an investing vehicle for kids where they put in some money with additional money added that is designed to teach them about saving, investing, and the stock market.  It is “real” money and they either win or lose depending on what happens in the market, just like real life.  These lessons are sound and something that they will take with them through their whole life going forward.

While the portfolios have benefitted from rising values, they will now be putting money to work on new stocks with high valuations.  This cannot be avoided.  We will do our best to consider valuation with our new investments, and put in “stop loss” orders on stocks that are getting either too frothy or when we don’t necessarily want to ride all the way down if we’ve had big gains.  With this model, however, we do eventually put all the money back to work on new stocks, so overall valuation is always an issue.  This is a real-life investing lesson for all.

Timing of the List and Selections.

I will get these items selected in the next couple of weeks and start working with everyone on investing.  The kids need to get me a check and the money gets deposited and then they need to make the selection.  Everyone comes to the selection in different ways and it can be tough for them to make a decision about real money with real consequences.  But this is real life and decisions need to be made, which is a lesson in and of itself.  I want to get this done before they start going back to school by the middle or end of August.

The other thing that I have to do before then is update all the portfolios with the latest prices and valuations and dividends, as well as buys’ and sells’.  This also takes me a while because I comb through the statements and do it by hand as well as in excel.  Maybe someday I will farm out this process or create a system but for now I am doing it manually.  Maybe this is a 2015 project.  At least with google finance I can see the portfolios daily without doing much work and this is a big help for monitoring moves.

 

New Stop Loss Orders

Our stop loss orders have expired.   I went through the stocks and picked out a few more per portfolio.  These expire in 60 days (6/3/14) or if they are executed.

Portfolio One

Twitter (TWTR) is at $44.  Put in a limit at $35.  The stock has dropped since we purchased it and is very volatile.  Twitter got dumped on by the market and fell quickly, hit limit and we sold

Portfolio Two

Splunk (SPLK) limit at $60.  This stock has been a great portfolio but don’t want to ride it too far down.  Hit limit and sold off.  Note the stock has continued to fall far below this number, into the 40’s. Glad we sold.  At some point may look to get back in the stock

– Facebook (FB) limit at $50.  Same as Splunk.

Portfolio Three

– Splunk (SPLK) limit at $50 per above.  Hit limit and sold off

– Baidu (BIDU) limit at $140, has been down since we’ve bought it

Portfolio Four

– Nucor (NUE) limit at $46

– Seaspan (SSW) limit at $18

Portfolio Five

– Seaspan (SSW) limit at $18

– Baidu (BIDU) limit at $140, has been down since we’ve bought it

Portfolio Three

– Seaspan (SSW) limit at $18

– Baidu (BIDU) limit at $140, has been down since we’ve bought it

 

 

Stocks in the News

I try to check on the portfolios every couple of days and also watch for news stories about our portfolio companies.  Today I saw the following article about our natural gas company Anadarko with the scary title “Anadarko to Pay $5.15 Billion in Largest Ever Environmental Contamination Settlement”.  This sounds like bad news, right?

When I checked on the stock price, it had gone up by almost 15% on news of the settlement.  Apparently the market had already “penciled in” a much bigger cost and this was viewed as “good” news.

On the other hand, Twitter has been going down recently on various negative news and analyses.  Since the stock is so highly valued, as a multiple of revenues and profits, any sort of analytical approach can come up with widely different results (by contrast, a company such as Exxon generally trades within a narrower range). 

Portfolio Six Updated March 2014

Portfolio Six is our newest portfolio, and is one and a half years old.  The beneficiary contributed $1000 and the trustee $2000, for a total of $3000.  The portfolio is worth $3268, for a gain of $268, or 9%, which is approximately 6% / year.  You can see the detail on the right or go here.

We recently sold Yandex when the Russians invaded Ukraine for a tiny loss.  The portfolio contains three overseas and one US stock.

There were no sales in 2013 and dividends for taxes were $70.

Portfolio Five Updated March 2014

Portfolios Four and Five are both 4 1/2 years old.  The beneficiary invested $2500 and the trustee $5000 for a total of $7500.  The value is $9030 for a gain of $1530 or 20%, which is 6% / year.  See the details on the right or click here.

Portfolio Five now has nine stocks, with some recent sales tied to stop loss orders (Yandex, China Petroleum) and two others that we gave up on in 2013 (Alcoa and Riverbed).  The existing stocks seem well positioned, with 5 overseas and 4 domestic stocks.

Tied to taxes, the portfolio earned $284 in dividends (after foreign withholding).  There was a long term loss of ($493) on sales and a long term gain of $74.

With a recent sale there is $800 cash in the portfolio and we will pick another stock out of the list.

Portfolio Four Updated March 2014

Portfolios Four (and Five) are four and a half years old.  The beneficiary invested $2500 and the trustee $5000 for a total of $7500.  Current value is $9,729 for a gain of $2229 or 30%, which works out to about 9% / year over the life of the fund.  Go to the right or click here for portfolio details.

The 10 stocks in this portfolio are 60/40 US vs. overseas which is a reasonable balance.  There were no sales or purchases since the post summer buys of Devon and Seaspan (this is the only portfolio where no stop loss orders were triggered, knock on wood).  The biggest gain is Westpac, an Australian bank which pays a dividend of over 5% annually.  Seaspan still has a stop loss order outstanding but the rest seem to be doing well.

It is highly unlikely that the beneficiary will have to file taxes because of an absence of large income from work.  From the portfolio there is $254 in dividends and no gains or losses in 2013.

Portfolio Two Updated March 2014

Portfolio Two is ten and a half years old.  The beneficiary contributed $5500 and the trustee $11,000 for a total of $16,500.  Current value is $25,427 for a gain of $8927 or 54%, which works out to about 7% / year.  You can see the detail to the links on the right or here.

The fund has 16 stocks with an average balance around $1500.  Over time we will try to move the average position size to closer to $2000 and try to keep the fund less than 20 or so stocks to keep it easier to manage.  The fund is roughly evenly split between US and overseas stocks.

About half the gains have come from two US technology stocks – Facebook which we bought at what was probably the low point of $18.75 and it is now at $68 and Splunk.  We will watch those two stocks so we don’t end up riding the gains back down.

For 2013 taxes there were no sales so no gains / losses.  There was $383 in dividends, a rate of 1.5% / year.  The rate is lower net because a higher percentage of the portfolio value consists of technology companies which don’t pay dividends.