Monday, January 20, 2014

Noise Trader

As I noted in a previous post starting in late 2012 I bought some stocks (with less than stellar results).  In this post I will discuss my picks in more detail.  I should note I am not making recommendations, as will be seen my picks were based on personal idiosyncratic criteria.  But perhaps this post will provide some ideas.

I have a general preference for stocks with high earnings and/or dividend yields.  (The earnings yield is the inverse of the price earnings (PE) ratio.  So for example a PE ratio of 20 corresponds to an earnings yield of 5%).  These are sometimes called value stocks.  I also like investing in companies with which I am familiar especially through favorable (or at least neutral) experiences as a customer.  And I don't expect to be an active trader so I try to look at long term value.  I didn't evaluate the stocks I considered in any great depth (by for example carefully analyzing their financial statements or reading their annual reports).  This is mostly because I am lazy but I rationalize this with the belief that I am unlikely to find anything that isn't already reflected in the stock price.  I did look at the corporate governance scores (that can be found in company profiles in Yahoo finance) because I don't like being ripped off (even if the stock is cheap enough so that it is still a good investment).

In what follows I figure dividend yields for 2013 by just adding up the dividends for the year and dividing by the price at the beginning of 2013.  Adding this to the stock price change over the year gives the total return.  An alternative is to assume the dividends are reinvested but this is a lot more complicated, in most cases will make little difference and isn't what I do anyway (the dividends just pile up in my broker's money market account which is paying almost no interest).

As I noted in the earlier post I actually ended up buying a lot of an index ETF because it became apparent I wasn't going find 20+ stocks (I limited my investments in individual stocks to 5% or so of my account balance for reasons of diversification) which I was comfortable buying in a reasonable amount of time.  I chose the Vanguard ETF VOO which tracks the S&P 500 because it has the lowest expense ratio (.05% per year) of the S&P 500 ETFs.  The other two, SPY (expense ratio .09%) and  IVV (expense ratio .07%), are bigger and more liquid but as a long term investor I went with the low expense ratio.  VOO had a price return of 29.73% and a dividend yield of 2.38% for a total return of 32.11%.   Another alternative was VTI, a Vanguard index ETF which tracks the entire US stock market.  It had a slightly higher total return, 33.18%.   

My best individual stock pick was Aetna (AET), my health insurance company.  I see people claiming that everyone hates their health insurance company but I haven't had any negative experiences with them and the stock seemed cheap (low PE ratio).  It did well, up 48.11% while yielding 1.72% for a total return of 49.83%.

My other pick that did better than the market (for the full year) was JPMorgan (JPM), my bank.  Again a generally favorable impression as a customer (although they do tend to push some products of dubious value).  And I like that they are big, when I moved from New York to New Jersey they had a nearby location,  and when I unexpectedly needed money in Colorado I just had to walk into a local branch.  Again the stock was cheap and despite a seemingly endless stream of negative publicity it did a bit better than the market, up 33.00% while yielding 3.09% for a total return of 36.09%. 

During the year I bought another of the big banks, Wells Fargo (WFC).  It also did a bit better than the market (up 10.59% vrs 9.32%).

I believe oil prices are going to generally rise as we exhaust the earth's supply (peak oil) so I bought stock in a couple of large oil companies ConocoPhillips (COP) and ExxonMobil (XOM).  They did pretty well but lagged the market.  COP was up 21.83% and yielded 4.65% (total return 26.48%) and XOM was up 16.92% and yielded 2.84% (total return 19.76%).  During the year I also bought the Vanguard energy ETF, VDE, which was up 9.93% which again lagged the market (up 12.18%).

Another of my picks was Target (which I patronize more than Walmart).  It didn't do so well up 6.92% and yielding 2.67% (total return 9.59%).  (Walmart  did better with a total return of 18.08%).  I have kind of lost confidence in this pick, retail in general seems like a tough environment and Target doesn't seem like it has anything special going for it.

Looking for yield I bought a couple of electric utilities, Consolidated Edison (ED) and Public Service Energy Group (PEG), my gas and electric utilities in New York and New Jersey respectively.  I was familiar with them and thought they handled Sandy relatively well.  Due in part to concerns that interest rates might rise they didn't do too well (although better than a bank account).  PEG was up 4.70% and yielded 4.70% for a total return of 9.41% while ED lost .46% but yielded 4.42% for a total return of 3.96%.  I would have done better buying VPU (Vanguard's utility ETF) which was up 10.59% and yielded 4.15% for a total return of 14.75%.  I also considered Verizon, my phone and internet company but it seemed riskier, I was worried it would get stuck with investments in obsolete technology.  It did better up 13.56% and yielding 4.79% (total return 18.36), still seems risky though, it paid out more than it earned.    

Near the start of the year I bought VNQ, Vanguard's REIT index ETF.  This was attractive from a diversification point of view and it had a reasonable yield.  It did a bit worse than my utility picks, down 1.88% for the full year with a yield of 4.24% for a total return of 2.35%.  I doubled up on this position at the end of the year.

During the year I bought Intel (INTC) attracted by it's 4% yield.  The price was depressed because of worries about the future of the PC market but it seemed to me that Intel's chip design expertise should be transferable to other markets.  Perhaps this is optimistic.  Intel did a bit better than the market up 15.57% compared to 12.18% for the market over the same time period (actually almost the same time period for these partial year comparisons I am using the index (actually the VOO ETF) value at the close of the day I purchased the stock as opposed to the value at the actual time of purchase which I have no easy way to obtain). 

At this time I also bought Caterpillar (CAT) mostly for reasons of diversification (and IIRC a low PE ratio).  It has lagged the market a little up 8.81% as opposed to 12.18%.  And I bought the Vanguard high dividend yield ETF (VYM) which has also lagged the market a little (up 9.20%).

Later in the year I bought BHP Billiton PLC ADRs (BBL) attracted by the 4% yield and for purposes of diversification. This is a worldwide mining and natural resources company with a somewhat complicated corporate structure.  As Wikipedia explains it is a dual-listed company. You can also buy BHP Billiton Limited (BHP) shares.  BBL has a primary listing on the London stock exchange while BHP has a primary listing on the Australian stock exchange.  The shares are basically equivalent except that the BHP shares are franked (giving a tax advantage) for purposes of the Australian income tax.  As a result they trade at a premium (currently around 10%).  As best I can tell the BHP shares provide no tax advantage for typical Americans like me.  So we are better off buying the cheaper BBL shares.  The advantage is not enormous, if BBL trades at a 10% discount to BHP and yields 4% then BHP will yield 3.6%, for an edge of .4% per year.  In the short run BBL shares may do worse than BHP shares despite this advantage because the discount fluctuates but in the long run they should do better.  I was perhaps unduly attracted to the BBL shares because of the idea I was getting a bargain (I had been considering the BHP shares and then learned about the BBL shares).  They have lagged the market up 6.81% as opposed to 9.32%.

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