Nibbling At The Edges

January 11, 2012

I have been in cash, I mean cash,  since December 20, 2011.

This is out of respect for a secular bear market which may not end for a year or two and all the systemic cracks which are beginning to appear on our  ” wall of worry ”

That being said, no market rises or falls in a straight line, and there are bound to be occasional, tradeable bull reversals before the final positive breakout which ushers in a secular bull market, and ends the bear trend which started in 2000.

With $1,000,000 to invest, I am looking at annual money market interest income of $5,000 to live on unless I am willing to bear some risk to earn more.  When I had a business, the way I approached a reasonable return on investment was to aim at a return of 3x the 10 year Treasury rate and add a kicker of 3% for inflation.  At present, that means 9% per annum.  How much risk do I need to take on to achieve a 9% return on my investment ?

It doesn’t mean I need to be invested all the time.  It does mean I need to be invested at the right times to snatch 3% here and there and then cash out.  It means giving as little as possible back by successfully interpreting market signals before the herd turns positive or negative.  I have confidence that I can do this. Also, It means managing risk by picking symbols with the best upside potential.  I have confidence I can do this.

Where do I begin.  Well, we are in the November / May time frame so that is a positive.  If you start at the top and look at the Dow, S&P 500 and QQQ going back 10 years, you will see the Dow has provided a total return ( including dividends ) of 40% while the S&P 500 has returned only 9.5% and QQQ negative 34%.  So, I think I’ll have less risk in the blue chips.  I’ll eliminate big cap financials and concentrate on the highest dividend payers.  Ten Dow stocks should provide some diversification against specific risk and by picking the biggest dividend payers I’ll get some cushioning against a surprise drawdown.

So, Im going to begin by dividing my $1,000,000 into 25 positions of 4%  ( $40,000 each position ).  This first investment of 2012 will be for $40,000 further divided into 10 mini  positions of $4,000 apiece.  As a portfolio these 10 stocks project an annual dividend return of  3.974 %  so, ( if I had the whole million invested in these 10 stocks ) I’d at least have $39,740 income instead of $5,000 ( money market ) even if the 10 stock portfolio doesn’t budge.  All this without getting fancy on you and  selling  calls against various of these ten positions to wring additional income from these selections.

But, I am also investing in 24 additional positions of 4% ( $ 40,000 each ) , but only 50% of each 4%,  ($20,000 each ) for now . and only in seven positions of the ultimate 24.  The themes of these positions are DJ transportation, USA industrial materials and mining, USA oil and gas exploration, USA residential housing, and USA small caps which range in capitalization from $50 million to $3 billion. To me, at this juncture, the  rest of the world seems too iffy for a risk manager….global diversification be dammed !

So that’s $180,000 now  invested in eight of 24 projected positions ( 1 x $40,000/10 and 7x $20,000 ) ….Stay tuned

Contact me for the 8 positions if you want to consider copying  me…no charge.

Richard, aka Rich, Richie, Dick, RMG and Smiley from Woodlawn

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