Portfolio Three Updated August 2017

Portfolio Three is 10 years old.  The beneficiary contributed $5000 and the trustee $10,000 for a total of $15,000.  Current value is $19,143 for a gain of $4143 or 27%, which is 4% / year across the life of the fund.  See the details here or in the links on the right.

We have added some new, central analytics to this portfolio.  There are 3 stocks that we are looking at right now for being 80% – 89% of their 52 week high…

  1. ConocoPhilips (COP) – COP is an oil and gas company with a strong dividend.  It is at risk due to continuing low oil and gas prices.  We will consider selling it now
  2. Siemens (SIEGY) – Siemens is a successful European conglomerate with a strong dividend.  The stock is not far off 5 year highs, but down about 10-15% off recent peaks.  We will likely hold onto this stock
  3. Exxon (XOM) – Exxon is a lightning-rod political stock.  They are a well run company near their 5 year lows, hit by low prices for oil and gas.  We will consider selling it, but less likely than COP (above)
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Portfolio Three Updated October 2014

Portfolio three is our third longest lived portfolio, at seven years.  The beneficiary contributed $4000 and the trustee $8000, for a total of $12,000.  The current value is $13,638, for a gain of $1638 or 15%, or 3% / year adjusted over the life of the portfolio.  Go here for the spreadsheet detail or click on the link on the right.

The portfolio has almost half turned over in the last year, as 5 new stocks were added, out of the 11 total.  A recent purchase LinkedIn has had some turmoil with the tech stock issues but is a good longer term play, but we will watch it.  We are also watching Weibo, a Chinese internet stock hit by the same tech turmoil.

From the more traditional stocks, Siemens has been hit as the Euro has fallen vs. the dollar recently.  We will also watch Yahoo to see what happens with the Alibaba stock they own post IPO.

Of the stocks we’ve sold, mostly it is good riddance.  In particular Cliffs’ Resources went off a cliff since we sold it, down from $18 to $7.  The stock perhaps could be a good candidate for a purchase in the future as a value play.  We are trying not to ride stocks like that too far down.

Portfolio Two Updated October 2014

Portfolio Two is our second longest lived portfolio, at over ten years.  The beneficiary contributed $5500 and the trustee $11,000 for a total of $16,500.  The current value is $25,036 for a gain of $8536 or 51%, which works out to about 7% over the life of the fund when adjusted for the timing of cash flows.  See the details here or the link on the right.

We will be watching a few stocks.  Transalta has declined and has a dividend that might be unsustainable.  Yahoo went up on the Alibaba IPO and we will watch what they do in the future.  Both Diageo and Siemens have been hit by the fall in the UK Pound and the Euro vs. the dollar and we will keep them on watch as well.

On Sponsored and OTC ADR’s

In the accounts I attempt to offer a mix of US stocks and foreign stocks, under the theory that most of the world’s economy is outside the USA and for beneficiaries with a long time horizon, it is important to go where the growth of the future will reside.  In addition, this gives us some upside (and downside) if the US dollar rises or declines because foreign currencies do not always move consistently with our dollar.

Generally I have offered as stock selections ADR’s sponsored on one of the major US exchanges, either NYSE or NASDAQ.  These sponsored ADR’s must conform with US accounting rules (called GAAP) and other requirements, such as Sarbanes Oxley, which add additional auditing and compliance costs and supposedly provide offsetting assurances that the financial statements are correct and free from some sorts of defects.

From the perspective of the issuer, the foreign company listing in the USA, this provides additional avenues to reach potential stock holders outside of their local market.  ADR’s are easy for US citizens to purchase because they trade just like US stocks and do not cost extra to purchase, and don’t have any “direct” currency risk because it is always quoted in US dollars (although there is implied currency risk since as the host country’s currency moves against the US dollar, this affects the price).

However, not all firms find it worthwhile to issue ADR’s to reach US stockholders, and many do not want to pay the additional costs to comply with US accounting and regulatory rules.  Thus you cannot purchase many popular stocks, such as BMW, via an ADR that is traded on a major US exchange (NYSE or NASDAQ), because it does not exist.

Another alternative is to buy an “unsponsored” ADR, meaning one that trades on the over-the-counter (or OTC) market, which is also called the “pink sheets”.  OTC stocks can be seen because they have different ticker symbols, usually ending with a “Y”.  The OTC markets have traditionally had a bad reputation because they don’t have the same listing requirements as NASDAQ or NYSE and have been areas of “penny stock scams” and the like for years.

There is nothing inherently wrong with being in the OTC markets, however, and recently one of our ADR’s, Siemens, de-listed from the “sponsored” markets and became an OTC or pink sheet stock.  It received a new ticker symbol SIEGY.  The old stock symbol ticker was SI.  The volume transitioned over seamlessly.  This article, from the Siemens company website, describes the delisting process rationale and how it impacts US stockholders.

1) What is the impact of the delisting of Siemens ADRs from the New York Stock
Exchange (NYSE) on ADR holders?
Until May 15, 2014, Siemens American Depositary Receipt (ADR) facility was a so called
“sponsored Level II ADR program” which meant that Siemens ADRs were traded on the NYSE and
that Siemens was subject to periodic reporting obligations with the U.S. Securities and Exchange
Commission (SEC). Since May 16, 2014, i.e., after delisting from the NYSE, Siemens ADRs are no
longer traded on the NYSE or any other stock exchange in the U.S. This does not mean, however,
that Siemens ADR facility was closed down. To the contrary: Siemens converted its “sponsored
Level II ADR program” into a so-called “sponsored Level I ADR program”. This means that investors
are still able to purchase, sell and trade ADRs, although trading is no longer on-exchange, but solely
off-exchange (over-the-counter).
On May 16, 2014, Siemens filed a Form 15F to deregister its securities with the SEC. As a result,
Siemens reporting obligations were suspended with immediate effect (e.g., Siemens will no longer
be required to submit reports on Form 6-K or annual reports on Form 20-F to the SEC) Siemens
expects that its reporting obligations with the SEC will finally terminate in mid-August. Irrespective of
the delisting, high standards of transparency in financial reporting and first class corporate
governance will continue to be top priority at Siemens.
2) What was the reason for delisting from the New York Stock Exchange (NYSE)?
The goal of the delisting and planned deregistration was to address the change in the behavior of
our investors. The trading of Siemens shares is nowadays conducted predominantly in Germany
and via electronic trading platforms or over-the-counter. Trading volume of Siemens shares in the
USA was low, amounting to significantly less than 5% of its global trading volume in the year 2013.
As a consequence processes of financial reporting are simplified and efficiency is improved.

Thus from Siemens’ perspective, it cost extra money to do US based accounting reports but there was only 5% of its trading volume in the US.  Since the German accounting rules are likely as useful to investors as the US accounting rules, there is little additional risk in a stock such as Siemens moving to the OTC market from the “sponsored” ADR market.

This doesn’t mean that OTC markets aren’t riskier or less regulated than Sponsored markets (like NYSE and NASDAQ) – they are and the instruments that trade there are generally riskier, as well.  In the case of Siemens, however, it likely makes little to no difference.

Depending on your brokerage firm, however, OTC stocks can cost more to buy than listed stocks.  You need to look at the fine print in your statement.  It may involve extra charges or a higher cost / trade.  I am not planning on buying “new” non-sponsored ADR’s as of now but I am interested in seeing how this ADR trades on the OTC markets and what sort of extra fees (if any) that I might encounter when selling it.

Another option is to buy directly in foreign markets.  For instance, my brokerage firm probably would allow me to buy BMW in Euros on the German exchange.  To do this my statement would become more complicated because I would have currency gains and losses and instruments quoted in multiple currencies, the US dollar and Euro (and then this would get more complicated as I added currencies of other countries, such as the British Pound, the Australian Dollar, etc…).  For now I am not doing this but I will watch it and as the costs get further reduced at some point this will be a likely option.

I always learn a great deal by going through brokerage statements and details and noticed the ticker symbol changing on Siemens and then investigating “why”.  I also learned a lot about currency withholding on foreign ADR’s.  I can also see the explicit fees that my brokerage accounting is assessing.  This information has made me a better and more informed investor and I hope to pass these insights on to the beneficiaries of these trust funds.

 

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 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

 

Portfolio Five Updated November 2013

Portfolios Four and Five were both set up four years ago. The beneficiary contributed $2500, the trustee contributed $5000 for a total of $7500. The current value is $9,116 for a gain of $1616, which is 21%, or 6.6% / year over the life of the portfolio. Check results here or in the links on the right side of the page.

Recently two outstanding items in the portfolio were cleared up when we gave up on the metals company Alcoa, which is well run but faces ferocious state-supported Chinese firms willing to work at a loss.  We also sold Riverbed when it bounced up a bit as a raider considered a stake in the company.

The remaining stocks are either brand new (too soon to judge) or doing well.  We will watch Siemens which is near a 5 year high and not ride it all the way back down.  The current portfolio has 9 stocks, with 7 of the 9 being foreign ADR’s (the two recent sales were US companies).