Portfolio One Updated January 2013

Portfolio One is our longest portfolio, with a duration of almost 11 1/2 years. It began immediately after 9/11, an auspicious time for stocks.

Portfolio One has a current value of $28,635. The beneficiary contributed $5500 and the trustee contributed $12,500 for a total of $18,000. Thus the fund has gained $10,635 or 59% vs. the original investment, or 7.4% when adjusted for the timing of cash flows (annual contributions). You can see the portfolio here or on the right side of the links.

During the year we sold 2 stocks that were headed the wrong way – Exelon, the utility and large nuclear operator that came under question of whether they’d have to reduce their dividend due to lower profitability caused by cheap natural gas (a competing fuel), and Canon, a Japanese company that was seemingly well run and a long term holding which just kept falling.

With those 2 gone there is nothing really on our watch list right now, since Urban Outfitters has turned it around and is actually above our initial purchase price. We will watch that stock and probably sell if it seems to trend down.

Right now a bigger concern is over-valuation. We will watch stocks that have had strong gains in the recent market rally and we aren’t going to stand by and watch them go way down if we don’t feel that they are good long term investments.

We sold too soon on some stocks – one is Amazon which continues to DEFY LOGIC and climb even while essentially profitless. Oh well, that is a bit defensive, but we bought at $14 and sold at $90, and re-invested that money in other stocks that did well (like P&G which has returned very well especially when dividends are factored in). Today the stock continues to defy gravity and is at $284. When you do the math we left > $8000 on the table depending on assumptions by selling when we did.

If you look at other stocks we sold, a lot of them continued downward (some into bankruptcy), but others have come back a bit in the recent market rally, some even above the price we sold it at. No broker would typically “look back” like this but I want to be clear and transparent and learn (if possible) from our own investing history.

For taxes this year, we had almost $700 in dividends. Dividends are rising because companies are paying out a higher proportion of their cash and we also often select stocks with strong dividends. We sold 2 stocks with capital losses (long term) this year, as well. We didn’t sell any winners so this can be offset against income (up to $3000 / year), to the extent that the trustee has sufficient income.

Portfolio One Updated November, 2012

Portfolio One is our longest lived portfolio. It began in 2001 right after the 9/11/01 incident and thus has a duration of 11 years. Total investment by the beneficiary is $5500, investment by the trustee is $12,500 for a total investment of $18,000. The current value of the portfolio is $27,145, for an increase of $9,145 or 51% on invested cash. The annual return is approximately 6.6% when the timing of cash flows is taken into account. See the spreadsheet with full details on the right side of the site updated through November 2012 or go here.

Recently we did a couple of sells in the portfolio. Canon (CAJ), which had performed well for years, did a nose dive along with most of the Japanese market. Many of the Japanese electronics companies are falling on hard times, given that the value is moving to software and the Korean companies like Samsung seem to be dominating. While Canon still has a strong position in cameras and imaging, it was time to sell.

Exelon, the US utility that is one of the largest nuclear operators in the United States and has been well run in recent years, has also fallen on hard times. The switch to natural gas overall in the US has changed the economics of power for years to come and the nuclear and coal fleet is having difficulty competing. Their dividend is under pressure which is critical to the valuation of any utility stock. We reluctantly sold.

Looking over time, the current holdings are doing pretty well. There are 16 stocks in the portfolio, making it relatively diversified, and recent purchases have been in Canada, South Africa and Norway to provide some US dollar diversification. The stocks are mostly about $1500 each, with some under $1000 and a couple over $2000. This is likely about the total amount of stocks to have in the portfolio, so future purchases could be consolidation of existing purchases or tied with sales.

Dividends make up $2704 of the total return, and the portfolio is full of strong dividend paying stocks going forward. Expenses (fees) have dropped almost to nothing the last few years because we have been getting free buys and sells on the account and no annual fee has been levied. On the other hand, interest income has drifted down to pennies and is almost not worth recording anymore.

Buy And Hold Works… Sometimes

For these trust funds we work to link stock selections with long-term thinking. These portfolios start when the beneficiary is 11 or so years old so they have a long time horizon.

With that, there are times that it is wise to sell. If you believe that a stock has been part of a huge run-up and gains are not sustainable, you should sell. We sold a number of stocks in 2007 when valuations were insanely high (such as China Mobile (CHL), which peaked near $100 in 2007-8 and now is settled back in around $50 / share) and many of them have not recovered back to those levels. Unfortunately, we re-invested the proceeds into new stocks which promptly went down with the rest of the market but it still was the right thing to do.

On the other hand, some stocks seem to get permanently impaired or on a downward spiral from which they never recovered. We bought Nokia (NOK) and then sold at a loss – and the stock has kept dropping since, damaged by their dismal position in the smart phone market. We also did the same with Cemex (CX) which also had a high near $40 in the 2007-8 time frame but has settled to around $10 / share.

It is hard to know when to capitulate, and when to hold on to wait for the rebound. Urban Outfitters (URBN) was selected because it had low debt and seemed well run – until they had a bad earnings report and the stock tanked. We held onto it for over a year after it had lost about a third of its value, and then a lot of their top management resigned. Yet recently it came back and is now above its original purchase price. Other stocks that we waited on until they came back include Comcast (CMSCA) and Ebay (EBAY). On the other hand, we are still waiting for recovery on Canon (CAJ), Riverbed (RVBD), WYNN, Exelon (EXC), and Alcoa (AA). I am bullish EXC in the long term as well as RVBD; I think there is hope for CAJ because they are well run; and watching WYNN and AA.

Portfolio One Updated August 2012

Portfolio One is our longest portfolio, going on 11 years soon. Here is the latest update or it is on the links on the right side of the dashboard.

Portfolio one is worth $24,609 on a beneficiary investment of $5000 and a trustee investment of $11,500, for a total of $16,500. Thus gains are $8,109 or 49% over that 11 year period, an average of approximately 7.1% / year when the investment pattern is taken into account (we have been adding to the portfolio annually since 2001).

Due to the fact that our brokerage company no longer charges an annual fee for an account and commissions are often waived (due to the trustee having a certain number of “free” trades each year), total expenses across from the life average about 0.3% / year and trending down. Since a large element of total return consists of minimizing fees, this is a positive statistic.

Current Portfolio Update

The main purpose of updating the portfolio now is to prepare for our annual process of stock selections. At this time we review the stocks in the portfolio to see if there are any that we should consider selling.

On the “down” side, we have three – 1) Exelon, the big utility, which I want to hold onto as a long term play because there will be a coming lack of baseload generation 2) Urban Outfitters, which lost almost 30% of its value due to a quarterly earnings miss but has since gained about 1/2 of that loss back, and 3) Canon (ADR), a Japanese company that recently has hit an uncharacteristic spell of bad performance.

Another stock which still has big gains from long term dividends (and share buybacks, which should have the same net effect) but has had poor performance relative to its peers is P&G. The CEO is now cutting costs at headquarters (including moving some elements out of Cincinnati, which makes sense given that it is a global company and that is a regional location) and is under pressure to improve results, which I view as a positive potential element for the stock price.

Ebay was down for a significant period of time but recently had a big run up and is net positive. Ebay pays no dividends so it is exclusively a bet on share price appreciation. We will monitor eBay going forward.

Sold Stocks

In order to “learn” from past decisions, I update the CURRENT prices of all stocks that we’ve sold in the past.

In general, with 20/20 hindsight (something the “real world” lacks), our sales were generally the right thing to do, with the exception of Amazon (AMZN) which continues to defy gravity and is now near $235 / share despite earning little in real earnings. It’s price / earnings ratio is over 200, which is generally a sign of a “bubble” stock that is overvalued (although, like everything else, there are always exceptions to the rule, such as when a write-off occurs).

Stock Concentration

There are 16 stocks in the portfolio. Assuming that the stocks are from different industries and / or countries without high correlation, when you get beyond 10 or so you can generally consider yourself “diversified”. There will be a couple of new picks this year, and we may consider buying more of an existing stock that we want to keep long term.


Given the size of the portfolio, we do try to keep some money in “cash” in case some liquidity is needed. We have about $2000 in cash now, and will draw down at least $750 of that as part of the 2012 investments.

Stock Portfolio Review

In any portfolio it is good to keep and eye out for stocks that have had a big run up and might be at a point to sell as well as stocks that have dropped and don’t seem to have a chance to come back in the near term. We also watch for stocks that are just stagnant.

While we don’t rapid-trade in these funds we do rebalance occasionally. I am looking to re-balance before we buy stocks again as part of the annual purchase process (I contribute $500, they contribute $500, and then I “match” $500 for a total of $1500 every year) which happens at the end of the summer. Since many stocks are held in more than 1 portfolio I only describe them one time.

Portfolio One

– Urban Outfitters – low debt, seemingly well run, has recently had departure of top executives. Holding on a bit to see if they can turn things around since drop already priced in. if they don’t turn around by end of summer will drop

– Procter and Gamble – has been a core of the portfolio for a long time with a strong dividend. The CEO recently had a bad conference call and the company hasn’t been growing much when compared to rivals

– Canon – has been a good long term performer but Japan still refuses to have a stock market rally. Need to look at this more but want to have some Japan exposure

– Comcast – held on for a long time when the stock did nothing or tanked because believed in broadband growth and they also added and boosted their dividend over the years. Will watch to see if now it is over valued after the run up

– Ebay – another stock that did nothing for years and went down but finally came back. No dividend but basically a bet on pay pal since they sold Skype. Will look into this some more may want to take profits

– Exelon – the nations’ biggest nuclear utility. Now getting beat because of the low price of natural gas. This hurts coal much more than nuclear because nuclear always runs but it limits its profits, as well. They just took over a big Eastern utility. Will keep holding but watch

– Wal-Mart – recently ensnared in a bribery case. Given their massive size it didn’t move their stock price that much. They have been buying back shares aggressively and boosting the dividend which increases profits per share. On watch

– Philip Morris – had an immediate, great run up. Also a good dividend. May want to see for gains

Portfolio Two

– Also Urban outfitters, Wal-Mart

– Wynn – took almost a 20% hit out of the gate with the share holder dispute issue. Has regained half that loss. Still a great play on China gambling. Will watch

– Siemens – had a big run up but now back to break even. OK run but subject to Euro issues and overseas expropriation and potential corruption issues. Will watch

– Diageo – had big run up and fall, much of which was caused by gyration of UK currency vs. US dollar. Up now at some point may take profits

Portfolio Three

– Also Urban Outfitters, Siemens, Wal-Mart, Wynn

Portfolio Four

– Also Wal-Mart, Exelon

– Nucor – a well run metals company in the US that is subject to vagaries of US economy as well as foreign price competition. Will watch but hate to part with it because it is well run but may not be able to sustain high valuation (see Southwest Airlines)

Portfolio Five

– Also Seimens

– Alcoa is a company like Nucor, well run but hit hard by foreign competition and international prices and demand. Like Nucor would benefit from US rally post “great recession” but that never really materialized. Will continue to watch

– Riverbed – a company with high growth prospects that lost 30% of its value in a single day when they slightly missed their earnings. Held on and since they have hung on at about the same price. Will hold through an earnings release or two seems transient not permanent

Japanese Stocks

The recent events in Japan have impacts on stock portfolios around the world, including the trust funds that I manage and discuss on this site. There are really four general areas to discuss:

1) Japanese companies which have been directly hit hard by the events as the Japanese market dived (the EWJ ETF which represents the broad market is down about 11% in the last 30 days, vs. 5% decline in the S&P 500)
2) The impact on the Japanese currency, which is up about 3% vs. the US dollar in the last 30 days (after an intervention by the Bank of Japan which tried to stem the gain)
3) The impact on other firms because of the supply chain in Japan (for example GM is shutting down some plants in the US due to a lack of spare parts)
4) The impact on companies that sell to the Japanese people (for example Japan is the largest luxury market in the world for Tiffany)

While I watched with dismay as some of the stocks in my portfolio were part of this decline, notably Canon (CAJ) and Toyota (TM), and Nidec (NJ). The popular wisdom is that the hedge funds bailed out of the Tokyo market, accelerating the decline, much of which has subsequently been recovered. I can’t verify if that is true or not.

In our portfolios, we tend to sit tight and hold unless there is a compelling reason to sell. I think that these three companies are still good companies and if anything, at their current values, they are more of a “buy” than ever. I am not averse to selling when I think that a company is poorly managed or stuck in a dead end industry, but this is not the case with these stocks.

Some of the losses (in local currency terms) were pared by the fact that the currency appreciated vs. the dollar, which shielded some of the blow. This is part of a long term trend of the USD weakening vs. the Yen, as you can see below.

While I make my own choices I do like to go to multiple sources for research. I appreciated the directness of Barron’s approach in their most recent issue, which makes no bones about their recommendation.

Buy Japan

The earthquake, tsunami and subsequent nuclear events also raise the value of diversification. While you can’t prepare for these sorts of events in your portfolio directly, by spreading your bets across countries, industries, currencies and asset classes you can diminish the blow (and also limit your upside).

For now I am happy with my decision to sit tight on the Japanese stocks, which has been partially vindicated by the recent rally as well as the increase in currency values (which has other long term negative impacts as well).