Portfolio One Updated July, 2018

Portfolio One is almost 17 years old.  The beneficiary contributed $2000 net (of withdrawals) and the trustee $16,000 for a total of $18,000.  The current portfolio value is $42,930 for a gain of $24,930 of 138%, which is approximately 7% / year when adjusted for the timing of cash flows.  You can see the detail here or on a link on the right.

This portfolio has moved over to the beneficiary and the former trustee now has agency so that we can take advantage of free trades on the former trustee’s account.  We are now at a phase where it makes sense to consider making some sales to take “risk off” on the account.  In addition, cash yields about 1.85% “risk free” in a money market account, so the impact of leaving money in cash is less impactful (it used to be earning effectively zero).

Here are the stocks that we are considering selling:

1. Tesla (TSLA) – Tesla is a highly risky and volatile stock.  There is enough information out there about this stock to fill 10+ blogs like this.  As a result it is under consideration for selling
2. Anheuser Busch Inbev (BUD) – This giant multi-national beer company is well run by the G3 group out of Brazil.  But growth has been hard to come by because they are gigantic and they are battling the high end craft beer in the USA and cheaper alternatives abroad
3. WIPRO (WIT) – This Indian outsourcer has a low dividend and hasn’t been making much of a return.  A candidate for selling
4. Wal-Mart (WMT) – Massive retailer in battle for its life with Amazon.  Starting to acquire other companies and expand e-commerce footprint to compete.  May want to take earnings and move on
5. Illinois Tool Works (ITW) – ITW has been a great stock for many years.  They acquire companies and integrate them and have earned above average returns.  They recently have had some worse earnings results and maybe it is time to take gains off the table and move on
6. Comcast (CMCSA) – While Comcast has a hellish reputation, they have been a good stock.  Down a bit and under pressure, maybe it is time to take our gains and move on
7. Ebay (EBAY) – Ebay was an amazing pioneer.  After the spin off of PayPal (PYPL) which is doing great, they’ve not done super well, and seem far removed from most top-of-mind Internet conversations.  Perhaps it is time to sell off remaining eBay

There are 19 stocks in the portfolio (we bought Exxon Mobil XOM twice at two different purchase prices so we show them separately and it looks like 20 stocks if you count the lines).  They are not all of equal weight – they range from about $1300 to about $4300, but the average ($43k / 19) is a bit over $2000.

If all the above stocks were sold, that would be about 33% of the portfolio.  At that point we could determine how much to keep in cash (perhaps all, or maybe just $10k of it) and how much to re-invest.  These sales would result in gains but they would not be too significant; they are all long term sales and the maximum rate is 15% for long term capital gains (and this only applies to the “gain” portion, which would be relatively small for these stocks).  Would calculate a more exact amount if we were specific on what was being sold.

We executed this plan in August and will determine what to do with the proceeds.

 

Calculating Basis on a Stock Split

One of the more interesting side benefits of writing this blog and running the trust funds is that I take apart my brokerage statements in detail.  Recently, eBay split into two stocks as they spun out PayPal into a separate company.  Portfolio One owns 50 shares of eBay, which became 50 shares of eBay and 50 shares of PayPal.

50 eBay shares were purchased in December 2007 at a price of $33.50 a share or a total of $1675.  This is the “cost basis” or “tax basis” of the stock.  Regardless of how many times eBay and PayPal subsequently split or spin off, the total of the basis is $1675 and can’t go higher or lower.

Today, unlike when I started this blog, you can find pretty much anything out on the internet.  So I just typed in “eBay Paypal spin off stock price basis” and found this link.  In the link they said that the split percentage was calculated based on the market price of PayPal and eBay after the stock was launched… which was .5682 as PayPal and .4138 as eBay.  .5682 + .4138 = 1 as it must since the basis must be split between the two stocks.

As a result of this, eBay’s 50 shares must be worth .4138 * $1675 = $693.12 or ($693.12 / 50) $13.86 a share.

PayPal’s 50 shares must be worth .5682 * $1675 = $951.73 or ($951.73 / 50) $19.03 a share.

For fun, I went to my site’s brokerage account where they calculate the cost basis for taxes and they had different numbers.. eBay was $761.86 and PayPal was $927.14.  This totals $1689.

The difference between the $1689 – $1675 = $14.  That’s probably the commission we paid back in 2007 (when we weren’t getting free trades).  That makes sense, then.  Thus my “total” basis is $1689 to split between the two stocks.

I’m not certain what the difference is between the calculation I found on the internet and the brokerage calculation.  They are close enough, though.  This shows the complexity of the process – it would be much worse if I had bought eBay at many other price points over the years, and / or if it had split a bunch of times.

Well… I dug around a bit more and went to eBay’s investor relations site.  They had a document there from their head of tax describing one way to split the basis between the two stocks.  Here is a link to that document.

In that document eBay said the following:

Based on that approach and the assumptions and calculations set forth in Item 16 below, 39.2706% of an eBay stockholder’s aggregate tax basis in his or her shares of eBay common stock immediately prior to the Distribution would be allocated to such stockholder’s shares of eBay common stock and 60.7294% would be allocated to such stockholder’s shares of PayPal common stock received in the Distribution.

So if I plug in the $1689 ($1675 + $14) basis times .392706 I get $663.28 for eBay and $1025.71 for PayPal.  Aargh that doesn’t tie out either.  I think I might send an email to the support section of the brokerage account to ask.  Probably I am spending far more time on this than it is worth but since I am down the rabbit hole…

Portfolio One Updated October 2014

Portfolio One is our longest lived portfolio, at 13 years.  The beneficiary contributed $6500 and the trustee $14,500 for a total of $21,000.  The current value is $34,188 for a gain of $13,188 or 63%, which is approximately 6.6% / year.  You can see the portfolio details here or click on the link on the right.

Generally stocks have been in trouble recently so I updated the portfolio to check on everything.  We may put a stop loss on Trans Alta (TAC) soon because it has dropped about 12% in the half year or so that we’ve owned it and they have a high dividend which may be unsustainable (it is currently paying out 6.7%).

Another one to watch is eBay.  eBay has been a good performer and they recently bowed to activist investors and are going to spin out fast-growing PayPal into a separate company.  We may sell or just hold on to PayPal shares depending on how it works.

We will also keep an eye on the Norwegian energy company Statoil (STO).  They had a run up this year but gave it back recently.  They have a good dividend and are in Norwegian currency which provides a hedge against the US dollar but also which falls when the dollar rises (as it has been doing recently).

Stock Selections for 2014

It is time to select 2014 stocks.  Generally each fund selects 2 new stocks, although there are some significant cash balances available on the other funds (due to stock sales) and they may need to pick more than 2.  Each year we offer a mix of US and non-US stocks for selection.

US Stocks

Linked In (LKND) – $201 / share, $24B market cap, 52 week range $136-$258, no dividend, no debt.  Linked In is a growing and well run web company for business professionals to make contacts and find new opportunities.  They recently had excellent earnings for Q2 2014

Exxon Mobil (XOM) – $99 / share, $424B market cap, 52 week range $84-$104, 2.7% dividend, $11B long term debt.  Exxon Mobil is viewed as the best run energy company in the world and has a disciplined use of capital with a long term horizon.

General Motors (GM) – $33 / share, $53B market cap, 52 week range $31-$41, 3.3% dividend, $40B debt.  While GM has been in the news recently regarding recall efforts, they have a long term growth story with their presence in China and the growth of vehicles in that market, which passed the US in terms of cars purchased and has larger growth opportunities

eBay (eBay)  – $52 / share, $65B market cap, 52 week range $48-$59, no dividend, $5B debt.  eBay is a well run e-commerce company that also owns the payments company PayPal.  They have moved successfully to mobile and offer many products with “buy it now” and not just auction sales.

Foreign Stocks

Anheuser Busch Inbev (BUD) – $107 / share, $171B market cap, 52 week range $92-$116, 1.9% dividend, $49B debt. The iconic US company that makes Budweiser was bought by hard-charging Brazilians and headquartered in Belgium.  This is the dominant worldwide beer company.

Weibo Corp (WB) – $19 / share, $6B market cap, 52 week range $16-$24, no dividend, little debt.  Weibo runs a Chinese microblogging platform.  It is kind of a Chinese twitter.  They release earnings on August 5 we will also see the market reaction to those results.

Coca-Cola Femsa (KOF) – $108 / share, $22B market cap, 52 week range $92-$149, 1% dividend, $4B debt.  This Mexican company runs the successful Coca-Cola franchise along with beverages in many other latin and Spanish speaking countries.

China Life Insurance (LFC)  – $44 / share, $83B market cap, 52 week range $35-$49, 1.6% dividend, $14B debt.  China Life Insurance is a large insurer in mainland China, where the population is aging and opportunities for insurance will grow as a result.

New Stop Loss Orders Entered

Back in October we set up some stop-loss orders.  None of these orders were executed because the market has been up since then (for my stocks, at least).  Since the orders didn’t occur they were free to set up and it is free when they expire (or I cancel them).  We did “pull the trigger” on some stocks that have been on watch (Riverbed, Bancolumbia).

Stop loss trades are good for 60 days, and then they expire.  Given that the market has been on a tear, it makes sense to set up some more stop loss trades in case we move into an extended downward phase – I don’t want to watch the run-up and then watch them go back down.

While there isn’t a “rule” on stop losses, I am going to make some now.  In general:

– I don’t want more than 1/3 of a particular portfolio in “stop loss” mode (this may not apply if you have only a few stocks, like 4 or 6).  These are long term investment vehicles, and I don’t want to deal with re-buying an entire portfolio after a 10% small market correction

– If a stock needs to be sold, then sell it, don’t use stop losses as a wimpy sales mechanism.  We did clean up a couple of stocks that were on watch recently

– Remember that while stop loss orders can prevent you from taking a big loss, they also take you “out of the market” if it goes right back up

– Sales near year end will generate gains that may generate additional taxes for the government.  In general these portfolios are not as tax sensitive because they are owned by individuals who don’t pay much in taxes but if we had a big selloff it could cause them to pay some additional amounts to Uncle Sam

– Finally, remember that money sold off needs to be re-invested.  Back in 2007 I sold off some stocks that made big runs, and we did well and many of the stocks haven’t reached their pre-crash peaks.  However, that money has to be re-invested, and often the stock you pick is as over-valued as the one that you are selling.  This isn’t a free lunch…

Portfolio 1 – 20 stocks

• Urban Outfitters – URBN – at $35 (don’t want to ride this back down)
• PM – recently dropped from $92 to $85… Stop loss at $80
• SNP – went from 70 in July to 90 then down to $84.  Stop loss at $78
• TSM – was down to $12 then up to $20 now at $17.  Stop loss at $15
• CMCSA – from $37 to $50… a big run… At $44
• EBAY – big rise and then recently from $58 to $52…  at $47

Portfolio 2 – 18 stocks

• Urban Outfitters – URBN – at $35 (don’t want to ride this back down)
• SI – from $82 to $131…  At $123
• SNP – went from 70 in July to 90 then down to $84.  Stop loss at $78
• WYNN – from $94 to $164… at $150
• FB – $20 to $51, now $47… at 43
• SPLK – $26 to $75, now $72… at $65

Portfolio 3 – 10 stocks

• Urban Outfitters – URBN – at $35 (don’t want to ride this back down)
• SI – from $82 to $131…  At $123
• WYNN – from 94 to 164… at $150
• SPLK – $26 to $75, now $72… at $65

Portfolio 4 – 10 stocks

• NUE – from $41 to $55, now $51.  At $46
• SSW – from $15 to $25, now $21… At $18

Portfolio 5 – 9 stocks

• SI – from $82 to $131…  At $123
• SNP – went from 70 in July to 90 then down to $84.  Stop loss at $78
• SSW – from $15 to $25, now $21… At $18

Portfolio 6 – 4 stocks

• SSW – from $15 to $25, now $21… At $18

 

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.

Cash

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.