Could Black Gold be the Black Swan ?

December 11th, 2014

December 11, 2014

Not being part of the soon to be 3 year old  VTI trade, I maneuver in the market  using VTI and / or  SPY strictly as a  buy / sell signal.

For instance, I  had  written ( sold )  twenty plus  SPY 195 December puts which I closed out for pennies on the dollar this past Monday. That was my exposure to SPY.  My actions were saying I would rather own SPY at $195  than at $208, especially because I was being paid a premium to take the lesser risk of accepting delivery of  SPY  at a price  6% less than its 52 week high.

There are two ways I can approach SPY.

#1  Consider available macro data such as the falling price of oil in terms of what it means for SPY and act on my conclusions, or

#2 Wait until December 31 to see whether the month end price of VTI or SPY triggers a signal to sell  my entire ETF and equities portfolios.

If I had a day job, I’d probably follow path #2 relying on back tested history relating to SPY’s month end performance.  But, I’ve been retired since December 31 2006 so I am more of an activist when I believe what I see on the road ahead.  If I can make a case to myself for early action, I’ll lighten up a bit.  I don’t like sitting with accumulating losses.

In my last post I proclaimed that I had no fear of a Black Swan ( outlier ) disrupting the market because I have the Fed on my side with low interest rates almost forcing investors to consider equities.

I still feel the same way, except that it has been pointed out to me that the price of oil and the price of SPY have a history of travelling in the same  direction.  But, the market has been making new highs almost daily for all the reasons I enumerated in previous blogs despite the precipitous drop in the price of oil.  But does that mean  the directional divergence will continue ? !

I do know  that oil represents 8.2% of  SPY’s   value.  So, at some point,  the falling  price of oil must,  at the very  least, represent a head wind for SPY.

And, while lower oil prices are adding money to the USA  consumers purse it is also having a negative  impact on economies less able to withstand the oil price drop ( including Russia which is Europe’s largest trading partner ).  So, what happens to Europe’s ability to purchase from the USA if  it ‘s exports to Russia wither ? And, how does that impact 2015 profits of USA / SPY companies exporting to Europe…especially with the added  barrier of  paying for  imports from the USA with a weaker Euro.

At some point the world’s problems become ours as we shoot for higher highs.  So this has the potential to become more than a head wind.

In terms of my actions in the market, I have almost no  SPY exposure because of the Puts I retired.

Overall.  I am now  a little over 50% invested in the market  and geared to buy and hold or liquidate on December 31.  I like the quality of what I am holding, but, again, I don’t like the feeling of being submerged if I think the dunking could be more than a temporary phenomena !

I am holding   Sector ETFs  and some individual stocks which conform to ” smart ” criteria and depend on USA business rather than exports etc..

The Sector ETFs I’m holding are XLV ( health care ) FBT ( biotech ) IYT ( transportation ) and XLU.  The equities I am holding are TWX, BX, UNH, CVS, DIS,  DFS, RTN, LUV, C, and NOC.

What I am learning is to never say never about owning equities.  My equities have outperformed SPY since November 1.and  I am gaining confidence about how to reduce the specific risk of equities.  But,  SPY should always be a significant piece of my portfolio

 

Richard Maurice Gore

SPY Indexing vs Allocation

December 2nd, 2014

December 2, 2014

I’ve indicated in previous posts  that ” SPY ”  ( S& P 500 ETF ) is the benchmark against which market professionals., and  gurus  are measured for performance.

Thus far in 2014 ( eleven months )  SPY has appreciated 12.4%.  That is  5.3 times  the 10 year Treasury yield  ( 2.34 % ).

Would you be good with that,  ( 12.4% )  for the entire year ?  Or, would you want more ?  Remember, John Bogle and Warren Buffett  strongly suggest you don’t go any further.  Just “Buy and Hold” for the long run and your returns should set the pace for some very high priced money managers who,  at this very moment , are scrambling from behind in an all out attempt to catch SPY before 2014 draws to a close.

If your answer is  , ” I want more  than 12.4% ” , you may wish to consider each of the following  choices.

# 1 )  Time your  SPY investment by selling SPY when it ends a month below its 200 day moving average and by purchasing SPY when it ends a month above its 200  day moving average.    What could be more simple ! There have been only six round trip  SPY trades  using this methodology since January 4, 2000.  Five of the six  round trips were winners and the only losing trade was for negative 5%.  You would have gained 293.7%  since January 2000 …. a 14 year  average gain of 20.97% per annum versus Buy / Hold,  which would have rewarded you with an average of  7% appreciation per annum. . .   Obviously no guarantee of either of these results going forward…..Or,

# 2 )  ) You can choose to  play both sides of the street and  hedge your bets by trade  timing  half your investment in SPY  and  sitting  with the other  50 percent  through thick and thin as Bogle and Buffett  suggest you do with your entire portfolio.  Or,

#3 )  Maybe you believe you have the time  ,emotions  and  skill to handle more risk . And now, remember,  you are getting into allocation risk  when you begin to slice and dice the S&P 500 and add alternate investments.

With November now in the books,  SPY has appreciated 2.91 % while my combined allocated portfolio appreciated only  1.34% ( My allocated portfolio included SPY,  writing SPY Puts,  Sector  ETFs,  Cash Flow driven equities,  Smart ETFs ( including those which included those based on share Buybacks,  Moats,  Dividends and Momentum  )  The only deployment allocation which beat SPY was my cash flow driven equity selections at 3.85%.  Everything else became a drag on this allocations performance.

I have a great deal of  ground to make up after just one month with five months till May 2015..

SPY and VTI have ended November2014 above their respective 200 day moving averages,  so the ” BUY ” signal for SPY triggered December 30, 2011  continues in effect ,  with the finish line of  three complete years of no trades now in sight.

 

Richard Maurice Gore

,

Who is Afraid of the Big Black Swan ?

November 21st, 2014

November 21, 2014

Not me !  I’ve got the Fed on my side, and if you will read on you will see why I feel so confident.

There  is a well known saying in the stock market ” Don’t fight the Fed “.  The reason for this is that the Fed uses  interest rates to fight inflation and foster full employment,  And, their fight can impact  stock prices  in a very significant way.

Inflation is not a threat  at this point in time ( 2% is considered benign ), so the quest for full employment is at the top of the Fed’s  “To do ” list.   And, this is where the linkage to the stock market really starts.

Full employment needs employers who are  sufficiently confident to expand operations. And that, in turn , depends on consumers acting with  confidence.  How to make the consumer confident ?  You can make the consumer confident by creating the  “wealth effect”  which gives the consumer the confidence to increase spending.

How to create the ” wealth effect ” ?  Easy. – lower interest rates to the point where the stock market is the only logical place to put money and lower interest rates to the point where housing activity begins to lift off.  There is nothing like a rising stock market and increasing  housing   prices to make a consumer feel wealthy. It begins to feed on itself.  And, once this phenomena begins to gain momentum, don’t get in the way

And, Europe  and Japan are making it possible for the Fed to have even more of a free hand in its interest manipulation activity because Europe and Japan want to lower their own interest rates to head off deflation.  If you step back you will see that money leaving the very low, but riskier,  interest rate environments of  Europe and Japan will end up allowing the Fed to keep rates low for a long time because this money will end up in New York and  further depress the interest rate  ( yield ) of our 10 year Treasury Note ( 2.34% ).  All this can go on and on until our  economy regains its strength and eventually overheats.  Since it is starting at zero the Fed has plenty of time to sit on interest rates and create the wealth effect both in the stock market and in housing.

What all of this means to me is that I shouldn’t let temporary stock market  dips of dubious sponsorship unhinge me.  I should buy the dips until I see the economy beginning to overheat…indicating a black swan named “Inflation ” is about to float by.  I’ll be watching the Fed standing watch.

These posts are being written for me , (with you privy to my thoughts ) to give me  (and the rest of you newly minted IRA investors),  the courage to withstand all the market gyrations  by those intending  to create trading opportunities for their own benefit..

Richard Maurice Gore

The Race is On

November 19th, 2014

November 19, 2014

As of today, with the Dow and S&P 500 making new highs almost every day, its no surprise that the December 30, 2011 VTI  “buy” signal is looking good as we head toward month end.

Nevertheless, I wanted  to see how my selected sub-sectors are holding up versus the widely acknowledged market performance benchmark….SPY.

Here is the result ( since November 3 )

SPY ….  1.87%,    Momentum Stocks  ( such as AAPL, TSLA, BIDU, NTES, AOL  etc. )….  3.99%,  //  Smart ETFs  (  such as PKW, MOAT, SYLD  etc. )….   1.58%,

Smart Equities    (   such as CVS, SNE,UNH, BX, TWX etc.  )…   1.65%,   //  Dividend ETFs  (  such as VNQ, XLU, VYM  etc. )…..  0.70%

Energy ETFs        (  such as VDE   )….  -0.23%,   // Sector ETFs   (   such as DXJ, FBT, XLV etc. )….   0.52%

 

The average gain of  all  sub-sectors versus SPY is 1.37% versus SPY’s 1.87%.  I didn’t say this would be easy !

In terms of intellectual effort versus financial reward,  MOMENTUM equities are the only sub-sector outperforming SPY.  But, these same equities will most likely outpace the market to the downside when the market turns.  The missing consideration here is high anxiety.  If I had all my liquid net worth in these stocks I would be a nervous wreck.   The key to surviving here is to be very, very nimble and have a trailing trigger on the whole portfolio.  Maybe I can do that.  Worth considering expanding my allocation from 3.3% of  my liquid assets to 10%. Before I do anything, it would pay me to direct some effort toward establishing and testing this escape route.

SPY is outperforming everything else,  and standing behind it is my back tested VTI escape methodology.  That is why my SPY allocation is 58% of my liquid assets.

Performance aside, what I find rewarding about following these sub-sectors is that it is enabling me to have a better understanding of the downstream impact of a strong dollar and a better sense of where the arriving overseas money wants to go.

Considering the strong dollar and its impact on hard assets (  including oil ),  and our 10 year Treasury Note yield, I am better at appreciating what is driving equities beyond earnings yield.  I am becoming more and more convinced that the real equity drivers are a combination of rising earnings, sustainable and defensible profit margins, no to low debt,  increasing cash flow per share by virtue of buybacks and finally…dividends.  Believe be, if you can isolate equities by these criteria you have a fighting chance to outperform SPY over the long haul.

But, all bets are off when the market turns and the ride is temporarily over.  Then, the only rational reaction is to point your surfboard toward shore and leave the water as quickly as your plan allows.

Richard Maurice Gore

 

Nov 1, 2014 / April 30, 2015 Portfolio

November 2nd, 2014

November 2, 2014

VTI closed October still on a ” buy ” signal……713 consecutive days without a trade…..Total Return, including dividends, 70.74%.

But, if you put on this trade January 1, 2014,  the result , (with no trades ) is 8.9%. year to date

I use VTI as my buy / sell the market signal and SPY as my market entrant, ( year to date 9.7%  ) unless the medium and small caps included in VTI really begin to assert themselves in which case VTI will outperform SPY.  Lately the small and medium caps included in VTI  have served as a drag on VTI, but I’m watching for a resumption of small cap momentum.

Bottom line, I’d like to squeeze north of 10% from my market investments even if that involves more work for me.  Analytical plus clerical.

The question is how much more work and,  will it be possible for me to beat the SPY benchmark irrespective of how much work I put in.  SPY has a well documented  reputation for defeating smarty pants professional advisors and analysts.

For doing nothing,  SPY’s  9.7% is a pretty acceptable alternative to less than 1% in savings and money market accounts.

I’ve constructed an alternative portfolio to run against SPY ( starting at $201.16 ) for  the period November 1, 2014 to April 30, 2015 ( sell in May ).

SPY should represent 58% of this portfolio,  except it won’t.  It will be excluded from the portfolio because I don’t like the present price of SPY,  $201.16, and I have decided, at least till year end, that I would rather purchase SPY at a much lower price,  if possible,  and be paid to be patient to do so.  This means  I intend to write promises ( puts ) to purchase SPY on December 20th for prices in the $180 to $ 195 range …IF on the expiry date of the promise ( or before )  SPY is selling below the price(s)  I promised to purchase at.  My reward for making the promise is being paid a premium upfront, just as an insurance company is paid its premium upfront by you before you have an accident. I am the insurance company writing a policy against anything nasty happening to SPY.  I intend for the premium to amount to be  roughly 5% to 7% per annum.  Plus, the extra return I would make by purchasing ( being assigned ) SPY at say $180 instead of  $ 200.  Yes, I would feel much more comfortable owing SPY at $180 instead of $201.16.

Also excluded is the 5% I would normally invest in fixed income  ETFs as a cash reserve. So, the total excluded is 63% of my investible funds.

Therefore, I am starting with a real money portfolio amounting to 37% of my investible funds.

At the end of the story, I will confess how much money ( as a % ) I made or lost  trading SPY and add or subtract that from the results of my 37% portfolio.

Then, I will compare my result to a theoretical investment in SPY at $201.16  starting as of Monday, November 3.

The make up of my 37% alternate portfolio is as follows. ( 37% = 100% )

 

SMART ETFs …..27%

PKW, SYLD, MOAT…equal dollar amounts

 

SECTOR ETFs……13.5%

DXJ, FBT, IYT, XLV, VWO, FEZ…..equal dollar amounts

 

SECTOR ENERGY ETFs…..13.5%

VDE

 

EQUITIES……..23.5%

ITT, TWX, DIS, DFS, VZ, CVS, UNH, GLW, SNE, HCA…….equal dollar amounts

 

MOMENTUM EQUITIES……….9%

TSLA, FB, BIDU, AAPL, NTES, MU, UA, and AOL…equal dollar amounts

 

INCOME ETFs……13.5%

VYM, XLU, VNQ, DTN………equal dollar amounts

 

FIXED INCOME ETFs….. 13.5%  ( plus any money not  invested  or segregated  for SPY options ). On a market sell signal, all positions come here.

IEF,  BND, HYS, SHYG, VGSH, SHY, HYG and JNK …equal dollar amounts.

I’m using Friday’s closing prices to make it a little easier on myself, clerically.

This is what I am doing….I don’t advise you to do the same.  What I do advise is that you research each of the above symbols and then decide for yourself… This is me covering my rear end.

 

Richard Maurice Gore

 

New Portfolio Lineup versus SPY

October 29th, 2014

 

October  29 , 2014

This Post is further to my Post of September 27, 2014 ..” My Journey  Continues “.   It represents an effort to design an investment platform for IRA individuals  ( me ) which will squeeze more return from a mildly  uptrending market than I can from SPY.  Year to date, SPY has appreciated  7.9% and I can’t settle for that given my annual expense budget.

The new platform will represent far more ” work ” than simply monitoring SPY.    But,  the offset of this work is that it  will keep me on top of USA and International political and economic developments.  For me,  and that is a huge return  since I consider world events a fascinating giant jigsaw puzzle .  But, I should say,  I don’t know how anybody with a full time job could put in the amount of work I’ve set out for myself.

 

Here Goes:

# 1 – I reject the notion that my age determines the proportion of my portfolio to be invested in fixed income securities. For instance  60 bonds /40, stocks,  70 bonds /30 stocks etc. My contention is that equity allocation can be anywhere from 100% to 5%  depending on what’s happening in the market. Five %  represents my normal  ” fully invested” cash reserve for  fixed income ETFs.

#2 – I can see from a review of  my activities during  2014 that I always have a lot of money sloshing around in money market accounts because, not being  in sync with the December 30, 2011 VTI trade,  I fear getting  caught out accepting a more than reasonable loss at the point a sell signal is triggered.  I intend to address this leakage as follows…

#3 – Any money not invested ( cash in money market accounts )  will be split between writing short term, out of the money,  SPY Puts for an annual return aimed at  three times the 10 year Treasury note yield.  The balance will be invested in fixed income securities.

Here is the makeup of my planned portfolio

INDEX ETFs – 58% of available investment funds to include ( in proportions to be determined and discussed ) VTI, SPY, IWM, IWB, QQQ, and OEF.

SECTOR ETF FUNDS – Part A ENERGY  – 5%  May Include one or more  ETFs such as VDE, XOP, and OIH

SECTOR ETF FUNDS – Part B – Miscellaneous -5 %  May  Include one or more  ETFs such as  FBT, IYT, XLF, XLV and  ITA .

SMART ETFs 10% – May Include one or more ETFs such as PKW, SYLD,  VIG, MOAT and BFOR

SMART EQUITIES – 7%  – May Include one or more of TWX, DIS, DFS, VZ, CVS,  UNH, C, GLW, and SNE and others as determined by analysis.

MOMENTUM EQUITIES -5%   May Include one or more of  TSLA,FB, BIDU, AAPL, NTES,  AOL, MU, UA

INCOME ETFs -  Part A  Dividends 5%  – May Include one or more of DTN, XLU, VNQ, SDY, PFF, VYM ( VIG is included under Smart ETFs )

INCOME ETFs – Part B Interest ( Cash Reserve in lieu of Cash )  5% May Include one or more of IEF, VCIT, LQD,  BND, SHYG,  HYG, JNK,  VGSH, BOND, BSV and VCSH .

TOTAL = 100 % Financial Investment Assets

To determine whether all this work can equal or beat the appreciation I can achieve with one or two  ETF holdings…SPY or VTI. following 200 day, month end rules

Distance: November 1 2014 – May 1 2015 …Buy and  Hold….unless VTI violates its 200 day moving average at a month end.

This platform is hypothetical because I don’t want the extra work of   being  accountable  ( to me or you ) for exact numbers.  This is just to give you a general idea of what I am doing.  I will advise if there is a drastic change in my thinking and always when my Put positions change..

Will indicate on October 31 portfolio makeup to be bought Monday,  November 3, 2014

Richard Maurice Gore

 

 

The Focus of this Blog

October 26th, 2014

October 25, 2014

Anyone who reads my Posts has probably noticed I’ve veered more and more toward financial topics and have moved away from commenting on world event dynamics.

The reason for focusing more and more on markets is that I want to accomplish my original goal of designing a system to immunize me  (and you )  from the poisonous creatures the innocent can and do  encounter in the Wall Street jungle.

But, in recognition  of recent comments by Janet Yellen, Chairman,  U.S  Federal Reserve, expressing her concern about the widening gap between rich and poor, and an article in  Barron’s citing an analysis of financial data by Roll Call indicating there are 189 millionaires out of 538 members of Congress , I thought that this may be a good time to return to my Post of December 28, 2011 to enumerate the primary systemic issues which I believe exacerbate the perception among us that the system is rigged to perpetuate the status quo and result in a widening of  the wealth and influence gap  in the USA.

1-   Term Limits for Congress.  Government should not be an industry.

2-   Line item veto  for the President – Don’t throw the baby out with the bath water.

3-   Encouragement via protection and awards for whistle blowers. Example, that Ebola  nurse speaking out about he lack of leadership at her Texas hospital.

4-   Congressional staff conflicts of interest. Mainly with Lobbyists.

5-  Greater oversight of Lobbyists and increased transparency of Lobbyist activities and record keeping.

6-   Congressional ” legal” insider trading and front running based on information from  closed door Congressional meetings.

7-   Earmarks – Pork attached to important legislation .

8-   Elected officials and staff crossing the employment line between government and industrial companies  they have helped regulate.

9-   How corporate Boards are selected and audited.

10-  Investor rights .  The CEO is an employee in the employ of shareholders…He and the Board should be at  arms length not cronies.

11-  Flat Tax or Value Added Income Tax …no loopholes.

12  How Congressmen  report to constituents.

 

OK. So we are not perfect. But all the above can be impacted by the collective will of a democracy through the ballot box by having an electorate familiar with the issues. That’s where we need to improve…awareness / involvement via selecting candidates dedicated to improving the process via reform.

BUT,…. after all is said and done, I’d much rather be a Richard Gore, citizen of the US of A than a Richard Gorochovsky, living in Russia  and looking toward KGB Putin as my one and only beacon lighting the path toward  social justice.

Talk about hopelessness , the  New Russia vision of Gorbachev has devolved into a kind of commune run by a cabal of  cronnies who dispense their version of  justice. based on winks and nods and the corruption  they grew up with  and accept.   Take a good look at Putin’s face and ask yourself what your gut reaction would be if he entered the room as your interrogator.  And to tell the truth, I’d prefer him to someone  I imagine as one of his assistants !

No, …for all his supposed procedural  failures  I’ll take Barak Obama as my interrogator.  In his face I see idealism and compassion backed up by a Harvard Law  degree and a resolve to do the right thing..

Conclusion: We can stand some reform, but we are light years ahead of Russia and China in our quest for social justice.

Case Closed.

Richard Maurice Gore

 

 

Taking a bow….Part 2

October 16th, 2014

October 16,2014

Taking a bow can make your back  end a better target !

To be able ( smart / lucky ) to predict what will  happen to the dollar ( 90 days in the future ) in terms of Oil, Gold, Yen, Euro and the 10 year note… is great ! Take a bow.

But, concluding that this means an instant boost to the stock market is a bit more tricky because of all the moving parts which comprise market analysis.  That is why I used the word “SHOULD”  in caps in my last post.

Also as indicated in my last post, I did buy 500 shares of SPY at $197.49 ( todays price  $183.60 – unrealized loss $6,945 ).

It would have been more prudent, and only slightly less bullish ,  to have been paid approximately $2,000 to sell 10 puts ( 1000 shares- $180,000 ) of SPY for assignment to me at $180.

Yesterday, with the Dow down 400 points I did sell for $1,080 ten ( 10 ) December 20th  SPY Puts for assignment to me at $161. And, I’ll follow the market down ,taking bites ( writing options as I go )  till my overall position is rational in terms of the future.

My basic premise remains that with the 10 year note dipping below 2%  investors would rather own the growth and profit  outlook of a JNJ selling for $ 97.62 ( 10 %  below its 52 week high and yielding 2.87% ).

So what is happening to equities ?  Well, it seems that  some investors with a lot trading capital have decided they have waited long enough for a correction.  Using EBOLA, ISIS,  the Ukraine and a weak European economy as sentiment drivers, they have shouted ” fire ” and expect to capitalize on equities being shaken out of weak hands. They are buying Puts and I am selling Puts.

So, nowhere near fully invested, I’m just battening down the  hatches until the storm passes.  Of course, if VTI ends  October below its 200 day moving average, everything goes except option positions which will allow me to be assigned shares at prices I believe hold promise.

Richard Maurice Gore

I may not be a George Soros, but I’ll take a bow anyway !

October 1st, 2014

September 30, 2014

For me, there isn’t  much that’s more intellectually satisfying than correctly predicting the direction of  the Euro, Gold, the Dollar, and Oil and where the stock market SHOULD  be heading.

As  I get ready to take my bow,  please access, the Archives,  my Post of July 4,2014,  almost three months ago, ” Second thoughts on Gold ” wherein I indicated  the reasons why the Dollar would strengthen against the Euro, the Yen, Gold and Oil, ultimately  to the  benefit of Equities.  As predicted,  the Dollar has significantly strengthened ! ,. … but not terribly much to the benefit of Equities……Yet! )

In my opinion, as we enter October, the case for US Equities is still compelling,.. the Swans of  Hong Kong, ISIS, and KGB Putin notwithstanding.

Bottom line, I’m convinced there is no safer place to put money than in the USA Equities Market…. .

As we close September,  my  VTI market canary is still chirping away, 3.52%%  above its 200 day moving average,  giving me the courage to invest 1/12 of my remaining liquid assets in SPY over the next few days.

Richard Maurice Gore

PS I’ll also take a small bow for having stayed the course and publishing this Post… # 100

My Journey Continues

September 27th, 2014

September 26 ,2014

When I discovered ” SPY ” , I thought my investment journey was at an end.  All I had to do was  trade  VTI /  SPY  trends  and  be assured  of controlled losses and unlimited gains.  And , last year,  I did,  in fact, cover almost  all  of my household expenses.

This year is a different story.  I am ahead, but I had  better come up with an improved method  to reach my annual financial goal.

For instance, year to date,  SPY has appreciated 7.7%.  That is $77,700 on a 1 million dollar investment, $38,500 on $500,000 invested,  $19,250 on $250,000 and $7,700 on a $100,000 investment.  The Real Estate taxes on my house are almost  $36,000 so there is a need either  to build a better mouse trap or burn savings to cover living expenses.  Of course, another alternative would be to reduce living expenses.  But, this journey is not about austerity budgets. Its about moving on up,  instead of moving down and out. .  Its about  what keeps the blood circulating in my brain.

Because there have been no opportunities to trade SPY this year , ( VTI hasn’t ended a month lower than its 200 day moving average ), and, because I intend to leave expenses at their current level, I have no choice  other than taking on more risk  than the market timing risk that accompanies “SPY ” via my market canary VTI.

I am going to review my alternatives out loud.  And, I’m not going to make any significant moves until this is thought through…in the open, in this and subsequent posts.

SPY is the performance benchmark that all analysts, advisors, hedge funds etc are measured against .  And, according to John Bogle, Founder  of Vanguard, the majority of paid professionals don’t measure up to the results achieved  by VTI or  SPY.  And, his opinion is shared by Warren Buffett  It just so happens that I intend to invest most ( at least 51% ) of my liquid net assets in SPY or VTI or IWB or IWM  based on which of these indexes is leading the market.

On the other hand, its just been reported that the YALE endowment returned something north of 20% this year.  The middle ground between the  SPY  result and the Yale result,  (+/- 13.5%  ) is where I want to be.

I know that endowments are usually  involved in alternative investments,  supposedly giving them an advantage over  traditionally assembled equity  portfolios.   The closest I can come to that, on my own, is to  invest in the Blackstone Group, symbol BX, which has investments in residential real estate mortgages and consumer paper.  Blackstone has $270 billion in assets under management, yields 5.40% per annum and,  at $31  is almost all the way  back from its visit to below $5 per share in 2007.  Clearly, I can’t wait eight years for an investment to re-emerge from the watery depths.  But, I will invest in Blackstone, purchasing  just a few shares. They are supposed to be the best of their breed and whatever small investment I make should yield information about the  alternative investment universe.

One step down from SPY, ( but up one step  in risk ), are  ETF  sector funds.  Investors Business Daily organizes the stock market  market into 33 broad sectors containing  197 sub-industry groups. IBD estimates that 12% of a stock’s performance depends on the broad sector in which it operates and 37% of a stocks performance is dependent on its sub-industry group.  I suppose that means the balance of its performance ( 51% ) relates to the specific issues a company confronts.

For  my convenience , I’m going to reduce the broad sector head count from IBD’s 33  sectors to a more manageable State Street Global Investor’s 9 SPDR -ETFs.  They are listed with their 2014 year to date results as follows;

XLP ( Consumer Staples ) 4.5% , XLY ( Consumer Discretionary ) 0.2%, XLI ( Industrial ) 1.1%,  XLB (  Materials)  8.0%,  XLK ( Technology ) 10.6%,  XLU ( Utilities ) 10.3%, XLE ( Energy ) 2.6%,  XLF ( Financial ) 5.9%,  XLV ( Health Care )  16.2%..

Unless, a sector ETF or sub-Industry Group ETF  is outperforming SPY there is no reason to be invested in it….because of the extra risk involved….and, because our goal is to beat the benchmark’s 7.7% return.

Broad sectors and sub-industry groups are more risky than SPY because of  ” rotation risk”.  Sectors and industry groups come into favor and go out of favor at different times and for different reasons and at different speeds.  Here is where charts come in handy.

I want to be on the lookout, not just  for chart trend line crossovers of the ETF’s price,  but the crossover of one trend line above or below another.    Just last week there was a lot of buzz about the 50 day trend line of IWM ( Russell 2000 index  ) crossing below its 200 day trend line….an ominous  ” death cross ”  for the entire stock market.  I want to  check to make certain money is flowing into the subject ETF and not leaving.  I also want to determine whether or not volume ( in relation to 90 days average  volume ) is above the 90 day average on increases in price ( conviction ).  Finally, I want to select and sort, top down,  what I consider are the healthiest looking charts and then ask the question ….why?

If I’m not comfortable with the answer to the question ….Why?,  then no investment.  If I am comfortable I will invest.  The amount of money for investment in sector and sub sector ETFs is yet to be determined.  An initial run through the list of ETFs I follow shows very few have outperformed SPY ( 7.7% YTD ).  A sprinkling of those who have are FBT ( Biotech 13% ) RPG ( Fastest growing third of S&P 500 index )  11%,  QQQ ( Nasdaq 100) 12.1%, INP ( India ) 25.6%,  XLV ( Healthcare )16.2%, and XLK ( Technology ) 11.1%.   At some point,  soon, I’ll publish a list of the Charts I follow.

And then, there is the recent development of ” smart ” ETFs whose component stocks have been handpicked for a reason.  Stocks selected for inclusion can come from any ETF sector.  These stocks are included because they share  predetermined business operating  and performance criteria.

For instance, stocks selected for the PKW and SYLD baskets are based on the propensity of the included companies  to buy back shares from shareholders at lower than fair market prices,  to the benefit of the remaining shareholders.  And, ( my criteria ),  these repurchases must not be financed by debt.  These component companies share revenue growth, healthy operating margins, and free cash flow that is not required for capital reinvestment and / or acquisitions .  Companies in the VIG basket  operate the same way but focus on increasing dividends rather than share re-purchases. The level of dividends isn’t as important as the record of increases…demonstrating continually improving operating performance.  And, then, there is ” MOAT” , an ETF containing 20 companies who have demonstrated they enjoy a sustainable advantage over their competition by virtue of product patents, scale,  systems that are not easily transferrable etc..

What I especially like about these four ETFs is that their portfolio components represent the ” cream” of a ton of research to arrive at what I consider to be the safest possible investment in stocks, and well diversified, as follows ; PKW   (175 holdings ) , SYLD ( 102 holdings ), VIG (163 holdings ), MOAT ( 20 holdings ).  These are real businesses which subscribe to practices which result in the creation of long term value.  You don’t date these stocks, you marry them.. except for temporary separation during severe market downturns.  This is as close to “buy and hold ” as I will ever get.

All that’s left here,  is for  me to refine this ” cream ” by gradually analyzing all 460 of the above components ( I’m positive there are quite a few duplications because of redundancy of selection criteria ).  The result will be 20 entrants into the RMG personal ETF portfolio.

Want returns north of 25%. ?   This is where you really take on risk unless you manage the risk by the size of the investment in relation to the balance of your financial investments  and the number of names in the portfolio.

Everybody gets excited about names like Facebook, Twitter, Baidu,  Stratasys, Tesla,  Sales Force .com, Apple, Ali Baba, Netflix and Amazon.  All great businesses except I’m not 100% comfortable with what the management wants versus what I want.  An illustration would be Jeff Bezos vision of how he sees Amazon.  I believe many of these entrepreneurs see their creations as a reflection of themselves, and I don’t trust that.  I’d rather they thought that the growth rate of their free cash flow is a better, more flattering reflection.  That doesn’t mean I don’t admire  what these entrepreneurs  are accomplishing.  It just means I see my money more as a hostage than as an investment and that makes me nervous.  My goal is to create an RMG 20 stock  momentum portfolio with the riskiest  5% of my liquid assets and accept the risk that goes with it.  Who knows how this will track ? !  It will be subject to my rules for selling VTI.

SUMMARY of Risk /  Return progression

1 )  Index ETFs……. VTI ,SPY,  only market risk.

2) Additional Index ETFs with a bit more risk / reward baked in….QQQ, IWM, IWB.  Contents of these baskets already  in VTI.  If VTI wins, these win.

3 ) Smart ETFs ….PKW, SYLD, VIG, MOAT ..Stocks can come from any sector based using the fruits of high performance to  enhance shareholder value

4 ) More Risk / More Reward ….” rotational risk ”  Sectors such as Energy  / VDE,  Transportation / IYT,  Biotech / IBB,  Defense / ITA  etcetera

5 ) Start to add specific risk by screening  individual stocks from Smart ETFs pool with an eye toward marriage. ( suggestion: 20 positions of 5% )

6 ) Add specific risk plus mania risk to Stocks that ( for me ) are difficult to value for the long term…I call these ” dating stocks “. SSYS, TSLA, FB,  TWTR, YHOO etc.

So that is it for now – just  preliminary thinking to make my journey more rewarding and fun without exposing myself too much.

Stay tuned

Richard Maurice Gore