Some endpoints...

There is always a shift towards "new" stuff .. new ideas and new transformations and new goals and new accounting methods or new  shift in paradigms or global trends or global business and so on .... so this "new" is one of the main constructor and driver for change and hence the market and market prices. There are new categories and business and segments and trade secrets in various abstractions and changes which did not exist earlier. This presents a major challenge to any automation. Hence even if you have an algorithmic approach or a mostly automated trading system, the underlying components will always require some or other  changes and tweaks.

Refer my earlier post on CEO pay, http://www.aflcio.org/Corporate-Watch/Paywatch-2014/CEO-Pay-by-Industry# and essentially these are executives that get paid to manage change and make sure that the company stays relevant, abreast of change and floating in a new world. The stock rewards are essentially a form of compensation.

Further dissecting my list of stocks: I think Directv is pretty good but will put it in a backburner mainly because of lack of dividends but it does have good growth points so I can just put them in the "more research needed" basket. The AXP and COF are good holds for long draw. Same with CAT or SBUX and MET. Continuing on the duality mode, T and VZ or KO and Pepsi are some that are also good as long as one holds on the down market. They are okay holders for the long term but good for the medium term. This is kind of vague statement but I will explore this more in the coming blogs.

Back to focusing more on the strategy and not the basket of stocks for the moment, I think some of the main reasons behind a non-free approach towards trading is the commission fees - now you can have a set amount aside and get some free commission trades .. there are apps like Robinhood or zecco at one time and Bank of America Merill lynch which are all decent brokers. Minus the commission factor, the basket of stocks can be traded a finite number of times. Without getting sucked into the whole quick trading scheme and thus letting your valuable mind space be occupied by such things as trades, shares, securities or investments - the real question is your staying power.

How far are you willing to stay put when the market goes up or down. Really it all boils down to the three action - buy/sell or hold. Buy and sell is easy. You can even set a target and be there. The hold and continue to hold is the key factor and when you are not in holding pattern you are either buying ( selling cash to buy stock ) or just plain selling your stock. In theory, if you have full confidence in this basket of stocks and if there are good ones which are more than making up for the bad ones maybe you can stay put. What do you do in this case- sell the good ones? Hold on to the bad ones? Or sell the bad ones and hold on to the good ones? What if the good ones go bad this time around and the bad ones are the ones that eventually performed well? Maybe something like that does not happen as market eventually rectifies itself - or maybe or maybe not. Frankly, the experience of 2008-09 financial crisis kinda left this aftertaste as to not overtly trust any particular company.

So one weapon in the hands of the retail investor or the small investor is the diversification. No matter what, do not get suckered into any particular stock no matter how much great it is going to perform in future. With the core being the dividend and utility players which are seen as more safe, there is a room for more along zing stocks and the bigger movers - along the lines that I have been building the stock basket of. Now assume we somehow construct this portfolio with a nice approximation of the stocks from various sector. Now, it is never possible to have an accurate weight-age so lets settle for an approximation.

Now, what do you do? If the stocks perform as per expectation for some time, giving dividends and making some decent upswings in growth - we hold on to it. Now comes the ride factor. Eventually all markets go up and go down. These things are not clear cut. They can happen suddenly and in case of individual stocks giving the investors very little time to react. Or they could happen over time. One may not be always glued to the news channel. AS there is life which is a bigger thing to attend to. Which is why the index funds are touted as an advantage since there is an automation factor already figured in the way the index funds buy and sell leaving the investor with focusing on the bigger picture instead. Or at least the big news events.

But I am still thinking about how best to strategize for stocks such as Fedex or UPS and how to handle them? Now, I am clear that this is not the algo to make a killing or something. But a few decent amount can be added, the core preserved and thus make the proverbial "make money work for you". Have to think about all this even more. Any ideas from anyone out there?

Anaylsis of stocks continued ..

Last time we saw the food sector in general. The conclusion was that at least at this point in May 2015, the valuations are high. The volatility is there. So this will be in the basket for now and I will revisit it when the sector is down or the market is down. In general, I would list food sector in the basket made of sector ETF + a few stocks that one is really comfortable holding into while emotions sway as the food industry is the  most visible industry out there.

Beyond food industry, one encounters the tech industry a lot. The apple, Google, AT&T phone industry, internet companies and social media are easy to spot. Like the food industry, they too are volatile but a bit more entrenched and have a stronger stability factor.

So I will create some portfolio - along the strategies .. such as bi low .. which will be a basket of stocks which I would buy only when they are in a low market. Think 2009. Another set of portfolio would be the zing list. This is something that I have done in the past too and used this list  for trading frequently or with in a medium term. I think this is a good strategy on a high market like now. Though a more efficient one would be to just stay put for now.

Meanwhile, the core portfolio compromising of stocks that are essentially a good one that you would hold for a long time, would be more like blue chip stocks, or maybe part of DOW or top S&P 100 stocks and so on. Though, belonging to such indexes by themselves mean nothing. C and BAC were also part of these when they tanked and were eventually removed from these indexes. Wonder where these indexes would be had these stocks not been removed.

A big reason I moved many of these materials from my personal blogs and notes to online blogs was to benefit the gen X and millenials and also more veteran stock traders as they could see the thought process, the evolution of the strategies over time and the ultimate evaluation. This is of course ongoing and it becomes difficult to keep track of various strategies and it is better if one sticks to one that one knows and more comfortable with. Rather than chase every existing or hot strategies of a moment. That is what is the key take away from more established investors out there. I dont believe in just buying indexes and then holding onto them. One has to sell them at some point. Just buying and selling indexes might be a lame exercise and I will do a testing of this one later down in the blog post. We have to essentially run a Monte Carlo simulations of the various scenarios.

Meanwhile, some of the stocks that come as evergreen for me is like Fedex or UPS. The reason being that it is a simple market, dominated by just two at the  moment. There are some tech startups which are striking to develop their own services. Chief among them is services like Uber or Lyft. If these somehow evolve to change to a short distance to medium distance courier service and when combined with the likes of Amazon and other local or national services with huge warehousing capabilities, we are looking at something that will give a strong competition for the likes of Fedex and UPSes. Easier said than done though as both these companies straddle Transport sector as they own aircrafts!, are global, can be categorized as a tech company apart from being the monopolized players in a saturated US market with extensive infrastructure and real estate holdings. Further they have very nuanced offerings like photos and printing amongst others. There are some emotional satisfactions in previous encounters in Kinkos too.

So dualities like FDX and UPS with tilt more towards UPS as they have a stable dividend is  a good deal. Same exists with other dualities such as HD and LOW or CVS and WAG and so on. Some of the retailers like WFM and KG could almost make that list. Point is take the top 2 or 3 and then stick with it. This is easily spotted in more matured and saturated markets such as the shipping services where Fedex or UPS operate but more difficult in other sectors such as say technology. Technology tends to be more diversified and though there are lines where Google and Apple are head on with each other, there are also integrated services where they are co-dependent. So I would stick to more neater categorization for now. Which also pretty much means that all these stocks in addition to the utilities and REITS will stay put in the may 2015 list for now.

TGT and WMT are the other stocks that shall also remain in the list. An interesting one is the COST .. as there are many costco followers out there just like some of the regional chains such as the wegmans/krogers/ralphs or trader joe kind. It is a good business and a standout has been the relatively low pay that the top executives take. Speaking of which, is there a service out there which lists down the companies with lower ceo pay or executive pays? Some has to do with passion for work than just more options.

MO is a standout and is an interesting holding stock. Though I am against cigar smoking I think most of these firms are just holding firms and pay rather pretty good dividends. Against MO we have PM, RAI and LO and a bunch of others with pretty decent dividends. I would put them in the bilo list given the high pe now and lower beta rate. These are core stocks once the market goes down.

Same with COST/TGT/WMT for now.

Disecting MO and abbot labs further, notice the random 50% drop in these stocks in the past. What to do in such cases? The more I dwelve and introspect about the markets and my experience with it, the more the realization occurs that it is not about a set of stocks but rather how you react to it that determines the outcome. At least to some extent. You can select a basket of stocks based on emotions, facts, numbers, statistical values, pure revenue and potentials, small town values, global appeal, entrenchment of said firms in a more developing country story or how well they are perceived in a particular sector or in the US. But a significant factor is also the behavioral dynamics of the investor. How much fees factors in .. in terms of commissions. How much does the time factor in .. what else could have been done during this time. The opportunity costs and so on. How would you react if the stock simply tanks and keeps tanking? What will you do if it keeps raising and raising? Is there any point in this? Or should it just emotionless and a math condition that a 20% uptick triggers a sell while a similar downtick triggers a buy? Would those models have fundamentally hold on when doing backtesting? Many instances says no. It depends on the gut. How much does a human truly discriminates between gut and emotion? Why need emotion beyond a point?

Back to baskets of stocks, Gilead seems to be the google of biotech industry. Which also means volatility. Same can be said of Abbot of which I am not aware much of but seems to be a bell weather in its industry similar to what JNJ or Pfizer does.

A good source to find the CEO pay is

http://www.aflcio.org/Corporate-Watch/Paywatch-2014/CEO-Pay-by-Industry#

Pretty nifty database with up to date numbers but if one goes by this most S&P 500 firms are going to be tough to get into justifiably. Most executives make a ton of money and some do okay work .. in the case of US, I think it is pretty much stick to the regulations and don't try something outsized or radical .. as long as one stays within a group, one should be fine.

Philosophically speaking, it mutes down the need for such exhaustive research and emphasizes the ETF or index fund line of thinking. Another justification to have the ETF or indexes as core of your portfolio in addition to cash! For individual stock picking, pick a few and focus on the behavioural analysis of yourself and how you are going to adhere by self laid out rules.  So what does one do mainly? I guess focus on one's own career and own a home/rental business and then own stocks/bonds mix via index funds as well as individual holdings but most importantly own your business. It could be anything from patented ones to any ideas or trade secrets or in these days something with huge data and scale which are managed by a software. But essentially, own a business. You may not want to be involved in it full time and want to do the nuts and bolts of it and then act as an adviser but it is essentially your own business is what will set you apart from the rest.

More on the food stocks ..

Today, I saw an interesting article about Shake Shack - for those who know a very popular burger joint in Manhattan area which is soon to foray into the LA area to take up the likes of IN N Out. On the culinary side, I am strongly on the Shake Shack side compared to In-n-Out. However, I got intrigued by the non culinary aspect of this companies. I got sucked into the food sector and soon I began comparing the Shake Shack with Habit Burger, Chipotle, the ever green MCD, and so on. Now, I am a big fan of Chipotle. And I had invested in the DRI - which has the olive gardens, DIN - apple bees, EAT and so on in the past.

Strictly speaking this list is easy to break down and really based on my food as well a the stock performance, I think it is better to stay with the biggies such as MCD. I am no fan of other places like Burger king or wendy or so on .. I like subway which is private. Among the chains, I like the pizza ones like Dominos or Pizza hut. When they go up, they can really go up and when they go down, they can stay there for a long time. Come bad news or Recession these are usually the first ones to go down. Hence, they bring up on this unnecessary stress to the investor as to whether to sell or hold on to these investments. Unlike say a MCD which like a WMT is a very diversified entity. On top of it, they are at all time highs at the time of this writing in May 2015. So for now, I would just hold off on this. Also, the food industry including MCD has the persistent problems about minimum wage increases, food preference changes in millenials, food quality, the chances that certain regions might not do well, real estate costs, unpredictable costs and simply plain old fact that a restaurant business is brutally competitive and you never know when a next truck is going to steal your business. Like on paper, I like the Potbelly more than the Panera breads more but it is the latter which has the better stock but no dividend yield and honestly does not correlate with the beta of 0.75 .. I see way more waivering and fluctuation of the graph. Add to this the higher forward PE. Investor psychology plays a role. For instance I like chipotle, shake shack, potbelly so might get emotional in buying and holding this stocks. Probably not needed for this. With MCD though, I never go there :D .. so maybe way less emotional about that.

Bottomline, even with MCD and the rest of the gang, I will just stay put for now. At max, these stocks might get added to a zing list. I will revisit them later in the down market.

The weeding of May 2015 list ..

As I have been doing some spring cleaning and weeding out and more importantly reselecting a new list of funds and stocks .. more so stocks, I will outline the process and data here. IT would be decidedly bad formatted or un-formatted but you would be able to pick up the gist.

First up the less interesting thing - the mutual funds and ETFs. This was fairly dominated by the big ones such as Fidelity and Vanguards and T.R.Price in the past. Now that I have more or less consolidated with Vanguard and some ishares ETFs, Vanguard pretty much will remain the core. Any data out there, the graphs with google finance or morningstar or any other charts pretty much point to the obvious conclusion that has been mirrored by lot of big names. The conclusion is that it is better off for a retail investor to hold on to the index funds or just do basic trading and re-balancing in them. Really there is nothing more to it or nothing that my experience in Finance as well as education in it has yielded. Part of the reason could also be that the index funds such as VTI periodically auto-rebalance themselves due to index changes or changes in weights of the constituents. Besides the graphs of several years point to this as a core strategy. Any back testing pretty much point to this. Add to that the human emotions and variables, I am pretty much doubling down on this as core holdings. Next to cash or treasuries, this is pretty much as safe and defensive and more offense-as-a-defense strategy as it gets.

Do you also want to hold some active funds .. just in case? In the past, FCNTX is the only fidelity fund and I am done with the rest of them. Vanguard has some good VWELX and balanced funds. I will stick with the vanguard ones here too. And no go with the rest.

That is pretty much it on the mutual funds and the ETF side. ETF in particular is interesting. I had good experience with them in the past when I put on various ETFs sectors in 2009 and booked some decent profits in 2010 thru 2011. I was convinced then that 2012 or 2013 could be a doom waiting to happen. But that is a timing problem and how to best deal with a rising market or how much to hold on too and so on .. that is a topic for a different day.

To the more interesting basket of stocks. Now stocks have different buckets in them. Dividend buckets such as REITS or utilities .. I think we can keep them on the side and subject to a different philosophy. Here we can simply divy them up into as many big stocks as possible and allot only to the very big ones. The ones from NY or NJ or OH or CA are so big in size that the chances of them going under are pretty minimal given the regulations maze that they operate under and the fact that they are being held by some of the biggest instituational investors as well as pension funds.

As mentioned earlier, some of the criterias that I had kept changing over time. Dividend was a big one and so was sheer performance once upon  a time. Some constant criterias were percentage of institutional investors - the higher the better as these guys more or less do their homework well. Fidelity in particular gives a pretty fantastic research tool ( bar none .. and leaves Vanguard way behind, TRP is a good second though I have not tried others but TD Ameritrade is decent too and so could be the likes of ETrade or TradeKing) which actually lists down the names of the institutional holders and the percentage that they hold of a particular stock as well as the changes over time. Pretty neat actually and a seriously handy tool and information set for people who are a bit more involved in trading and researching stocks. Given long time duration, beta is not that much of a draw. PE could be a slight thing to consider among other things. Remaining things more or less are out of the window though I do keep an eye of the location of headquarters, board of directors, number of employees and current dividend yield.

From the past, I culled out this list:

NASDAQ:WFM  NASDAQ:COST  NYSE:TGT  NYSE:WMT  NYSE:HOT  NASDAQ:MSFT  NASDAQ:GOOG  NASDAQ:AAPL  NYSE:RHT  NYSE:V  NYSE:MA  NYSE:WAG  NYSE:CVS  NYSE:HD  NYSE:LOW  NYSE:AXP  NYSE:COF  NYSE:DIS  NYSE:GE  NYSE:BBY  NYSE:CI  NYSE:EAT  NASDAQ:NFLX  NYSE:HOG  NASDAQ:CMCSA  NYSE:XEL  NYSE:PEG  NYSE:DPS  NYSE:KO  NYSE:PEP  NYSE:TJX  NYSE:AEO  NYSE:PFE  NYSE:MRK  NYSE:T  NYSE:VZ  NYSE:MCD  NYSE:JPM  NYSE:DD  NYSE:DPZ  CVE:FO  NYSE:RSG  NYSE:CVX  NYSE:XOM  NYSE:BA  NYSE:CAT  NYSE:UTX  NYSE:IBM  NASDAQ:DTV  NASDAQ:AKAM  NASDAQ:ADBE  NASDAQ:AMZN  NASDAQ:BBBY  NASDAQ:BIIB  NASDAQ:CHKP  NASDAQ:GILD  NASDAQ:SPLS  NASDAQ:SBUX  NYSE:WFC  NYSE:MMM  NYSE:ABT  NYSE:ALL  NYSE:MET  NYSE:BMY  NYSE:ETR  NYSE:EXC  NYSE:PM  NYSE:MO  NYSE:JNJ  NYSE:LLY  NYSE:ANTM  NYSE:AET  NYSE:BSX  NYSE:DE  NYSE:AEP  NYSE:ED  NYSE:D  NYSE:DUK  NYSE:FDX  NYSE:UPS  NYSE:LUV  NYSE:AWK  NYSE:BKS  NYSE:YUM  NYSE:TM

Add to this, the jcp/macy/kohls/garmin/JWN and so on .. all of which I have decided to stop investing in.

Another criteria that I had was not to bother if the size of the company is say less than a 5 billion range or maybe 10 billion range in similarly peer sized industry.That weeded out a lot of companies. While having an scillinating dining experience gives me an overdrive to invest in those companies, I think the food industry is too crowded though it is predictable. But I might keep them to ETF list too. I mean, I am interested in the DIN, EAT, MCD, YUM, DPZ, SBUX and so on .. and I think a lot of them are tech companies as well as food companies. So I am a bit interested in them and want to hold them. But I think strictly speaking, if the criteria were that "not to pay attention to these things over a long period of time", then these stocks dont make the cut. Because they fluctuate at times. Companies like Chipotle are relatively new but they fluctuate very wildly.

Just like Netflix in the video sector or the Directv or Dish TV and so on. To be clear, many of them have a sure shot role in a "zing" list but maybe I would just put them in this list and not really put them always in the core list. I dont want to be too reactive with such stocks.