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How I Created My Portfolio Over A Lifetime – Part III (A)

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The Good Business Portfolio: Second-Quarter Earnings And Performance Update

Summary The portfolio of good company businesses is doing 6.87% better than the Dow average year-to-date of -9.71%. The 24 businesses of The Good Business Portfolio comprise 99% of the portfolio, with the other 1% cash, and the average total return of 33.24% over the Dow average return. Create a portfolio that is balanced, not income, not dividend growth, not bottom-fishing, not value, but balanced among all styles. Of the 24 companies in the portfolio, 18 beat the Dow average for total return and 6 missed the total return over the test period of 32 months. For the second-quarter earnings season, 20 companies beat or met the expected earnings and 4 missed the expected earnings. This article gives a review of the second-quarter earnings and YTD performance of the Good Business Portfolio. Earnings data will be looked at for 5 of the top positions in the portfolio. Guidelines (Company selection) The intent in the Good Business Portfolio guidelines is to create a portfolio that is a large cap balanced portfolio between the different styles of investing. Income investors take too much risk to get their high yields. Bottom-fishing investors get cat fish. Value investors have to have a foresight to see the future. These are guidelines and not rules. (For a complete set of guidelines, please see my article ” The Good Business Portfolio: All 24 Positions “.) They are meant to be used as filters to get to a few companies on which further analysis can be done before adding the company to the portfolio. So, it’s alright to break a guideline if the other guidelines indicate a Good Company Business. I’m sure this eliminates some really good companies, but it gets me a short list to work on. There are too many companies to even look at 10% of them. You see from the portfolio below that I want a portfolio that is defensive, provides income and does not take significant risks. I limit the portfolio to 25 companies, as more than this is almost impossible to keep track of. At present, I have 24 companies and have an open slot awaiting General Electric (NYSE: GE ) and Hewlett Packard (NYSE: HPQ ) spin-offs. Portfolio Performance The performance of the portfolio created by the guidelines have year in and year out beat the Dow average total return for over 23 years, giving me a steady retirement income and growth. The table below shows the portfolio performance for 2012, 2013, 2014, and YTD of 2015. Year Dow Gain/Loss Good Business Beat Difference Portfolio 2,012 8.70% 16.92% 8.22% 2,013 27.00% 39.70% 12.70% 2,014 6.04% 8.67% 2.63% 2015 YTD -9.71% -2.84% 6.87% In a great year like 2013, the portfolio did fantastic. In normal years like 2012 and 2014, it beat the Dow by a fair amount. So far this year, the portfolio is being defensive at 6.87% total return gain above the Dow average loss of -9.71%, for a slight loss. Dividend companies and defensive businesses like Johnson & Johnson (NYSE: JNJ ) give the portfolio a downside beta of less than 1.0. Companies like Walt Disney (NYSE: DIS ) and Boeing (NYSE: BA ) provide growth in a good year like 2013 (an up market) for a beta greater than 1.0. 24 Companies In The Portfolio The 24 companies and their percentage in the portfolio and total return over a 32-month test (starting January 1, 2013) period are shown in the table below. I chose this time frame, since it included the great year of 2013 and the moderate years of 2014 and 2015 YTD. The Dow baseline for this period is 22.89%, and each of the top six easily beat that baseline. The next 18 have six companies that did not beat the Dow baseline, but still are great businesses. I limit the portfolio to 25 companies and let the winners grow until they reach 8-9% of the portfolio, and then I trim the position. BA and HD are now in trim position. I start the companies at a base percentage of the portfolio of 1% and add to the position if they perform well during the next six months. At 4% of the portfolio, I stop buying and let the company percentage of the portfolio grow until it hits 8% – then it’s time to trim. In the portfolio, only one company is actually losing money over the 32-month test period – Freeport McMoran Inc. (NYSE: FCX ). This is my full list of the 24 Good Businesses. I hope to write individual articles on some of these businesses as time permits. Dow Baseline 22.89% Company Total Return Difference Percentage of Portfolio Cumulative Total 32 Months From Baseline Percentage of Portfolio Home Depot (NYSE: HD ) 89.07% 66.18% 8.75% 8.75% Boeing 73.50% 50.61% 8.46% 17.22% L Brands Inc. (NYSE: LB ) 113.34% 90.45% 7.74% 24.96% Johnson & Johnson 38.09% 15.20% 7.59% 32.55% Walt Disney 97.88% 74.99% 7.50% 40.05% Altria Group Inc. (NYSE: MO ) 76.76% 53.88% 6.75% 46.80% Harley Davidson Inc. (NYSE: HOG ) 18.55% -4.33% 6.60% 53.39% Eaton Vance Enhanced Equity Income Fund II (NYSE: EOS ) 45.15% 22.27% 6.06% 59.45% Philip Morris Intl. INC. (NYSE: PM ) 1.71% -21.18% 5.55% 65.00% Cabela’s Inc. (NYSE: CAB ) 1.65% -21.24% 5.66% 70.66% General Electric 24.32% 1.43% 4.74% 75.40% McDonald’s Corp. (NYSE: MCD ) 15.22% -7.67% 4.65% 80.05% Automatic Data Processing (NASDAQ: ADP ) 37.45% 14.56% 4.13% 84.18% Ingersoll-Rand plc (NYSE: IR ) 39.77% 16.88% 2.42% 86.60% Hewlett-Packard 89.58% 66.70% 2.31% 88.91% Omega Health Inv. (NYSE: OHI ) 53.32% 30.44% 1.69% 90.60% Mondelez (NASDAQ: MDLZ ) 65.21% 42.32% 1.64% 92.24% Novartis AG (NYSE: NVS ) 58.54% 35.65% 1.62% 93.86% Texas Instruments (NASDAQ: TXN ) 46.23% 23.34% 1.33% 95.19% AmerisourceBergen (NYSE: ABC ) 132.33% 109.44% 1.14% 96.33% Kraft Heinz Corp. (NASDAQ: KHC ) 67.93% 45.04% 0.81% 97.13% Alcoa (NYSE: AA ) 5.95% -16.94% 0.87% 98.00% Freeport McMoran -63.21% -86.10% 0.72% 98.72% Hanesbrands Inc. (NYSE: HBI ) 218.64% 195.75% 0.34% 99.06% Average 33.24% Recent (Last Two Months) Portfolio Changes and Comments McDonald’s is being trimmed, as the total return for the past 32.0 months is below the Dow average total return. MCD is now 4.65% of the portfolio, and will be held at this total percentage until signs of a turnaround are seen. Short-term out-of-the-money covered calls of 2-3 weeks are also being used to generate income while we wait for the turnaround. The objective of the Good Business Portfolio is to embrace all styles of investing, Alcoa was increased to 0.8% of the portfolio. The change into a manufacturing business will take some time and is a move in the right direction. At the current stock price, it has good risk-versus-reward possibilities. Hanes Brands has been increased to 0.34% of the portfolio, and is just a starter position that will be increased slowly until it gets to be a full position at 4% of the portfolio if the growth continues. Eaton Vance Enhanced Equity Fund II was increased to 6.06% of the portfolio; I need more income, and EOS is the portfolio’s way of buying a diversified group of tech companies when the market dips. I trimmed Home Depot down to 8.75% of the portfolio from 9.0%. HD is a great growth business, but you must have some diversification and not let any position get too high. HD will be trimmed again when it reaches 9.0% of the portfolio. One comment: I have never bought commodity companies before, and both AA and FCX have disappointed me. A new guideline is being added to guideline 7 “to avoid commodity companies, metals and oil/gas”. It just seems too much risk in the face of uncontrolled world events to predict what the price of a commodity will be in the future. Second-Quarter Earnings Season For the second-quarter earnings season, 15 of the portfolio’s companies beat the estimated earnings, while 5 met the earnings estimate and 4 missed the estimate. A short summary of earnings for some of the companies is below. Boeing’s earnings were good at $2.31 before it had to take a charge against the tanker program. In the last month, the company delivered 14 787 planes – 4 more than planned. This should lead to a great earnings report in October. Revenue also beat by $320 million. Last year, Boeing got above 10% of the portfolio, and I trimmed it a little to get it below 10% of the portfolio. Walt Disney’s earnings beat expected by a few pennies at $1.45, compared to expected earnings at $1.42 and last year’s earnings of $1.28. Revenue missed by $130 million. Mr. Market did not like this, and the major factor was that ESPN lost 300,000 subscribers and Walt Disney went down 10%. The market recently took another 10% off Disney. I have a full position in Walt Disney and think it’s a screaming buy at its current price of $100.97. The Star Wars toys are already on sale and are expected to have sales of $500 million alone. Disney gets a share of this through licensing fees, and the movie is still to come in December. Home Depot’s earnings met expectations at $1.71, compared to last year’s earnings of $1.52, for a great gain year over year. Revenue beat by $110 million. HD is the portfolio’s largest holding at 8.75%. As the housing market continues to perform, HD will grow with it. It will be trimmed when it reaches 9% of the portfolio. I love HD, but must not be a pig. Johnson & Johnson beat expected earnings at $1.71, compared to expected earnings at $1.68 and last year’s earnings at $1.66. Revenue beat by $30 million, and the company projected forward earnings of $6.10-6.20 for the year. JNJ is in a defensive business. Its problem is the strong dollar, but the company continues to see moderate growth and pays a 3.5% dividend, which has been increased and paid for 48 years. JNJ is 7.59% of the portfolio, and should be in all portfolios. L Brands just beat expected earnings by a penny at $0.68, compared to expected earnings of $0.67 and last year’s earnings of $0.63. Revenue missed by $30 million. In August, LB announced an 8% sales increase year over year. It pays a fair regular dividend of 2.4%, but has been paying a special dividend for the past few years. Alcoa had a mixed report, with earnings of $0.19 missing the expected earnings of $0.24, but the revenue beat by $110 million. The transformation of the company is starting to take effect, and I will wait at least two more quarters to see if it’s a turnaround or sell this small position. I always like the earnings season, since most of my Good Business companies have increasing earnings. Conclusion The 10 guidelines referenced in the article give me a balanced portfolio of good companies that are large cap and can grow their revenues, earnings, and dividends for years. They have the staying power to fix whatever goes wrong. In each case, the company has the size and good management to fix the problem. The portfolio has growth companies, defensive companies, income companies and companies with international exposure, giving it what I call balance. Of the 24 companies presently in the portfolio, six are underperforming the Dow average in total return over the 32-month test period. All six companies are being hurt by the strong dollar, since they are multi-national and have a large portion of their income coming from foreign operations. It is my intention to write separate comparison articles on the individual companies. The Beta for the portfolio in a down market is less than 1.0 and in an up market is greater than 1.0, and this makes the Good Business Portfolio is a money maker that beats the Dow average over time – what more can you want? Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before making any purchase or sale. This is how I manage my IRA retirement account, and the opinions on the companies are my own. Disclosure: I am/we are long BA, HD, JNJ, DIS, LB, HOG, CAB, MO, PM, MCD, HPQ, GE, FCX, EOS, ADP, IR, OHI, HBI, NVS, KHC, MDLZ, AA, ABC, TXN. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The SPDR Dow Jones Industrial Average ETF: Crash Course

Summary The component of the Dow Industrials, as a group, has a proven successful investment over a century. Optimizing long term returns may be achieved by dollar cost averaging and dividend reinvestments. A steep stock market selloff will be an opportunity for those just entering into equity investing. Equity markets are hardly predictable. At times they’ll relentlessly trend upward, fundamentals notwithstanding. At other times they’ll cascade downward like an avalanche, trashing every investor who tries to call a bottom. In the short term, price fluctuations border on chaotic. However, if an investor takes a moment to stand back and look at equity market behavior over many, many decades, it’s sure to boost confidence. Here’s a price history of the Dow Jones Industrial Average (DJIA) from 1900 until August of 2015. Only a very few of the many notable historic, economic, national and global events are highlighted. There are numerous recessions of varying degrees, panics, wars, market crashes. There simply isn’t enough room to point out every headline event which had occurred over 115 years. Not highlighted are dozens of revolutions, coups, cold war standoffs, massive above ground thermo-nuclear tests and unimaginable natural disasters. The Dow simply shrugged it all off. (click to enlarge) Depending on your age, you might imagine investing in the Dow Jones Industrial Average when you were just starting out. To put a little icing on the cake, suppose further you’ve reinvested all your dividends. There are several “Dow Jones Return Calculators” which may be found with a little browsing. A few example returns are noted in the table below. Time Period Return (Inflation adjusted) Annualized 1960 – 2014 2069.783% 5.754% 1970 1608.424% 6.510% 1983 1317.406% 8.639% 1987 511.084% 6.678% 2002 98.870% 5.431% 2009 84.618 10.759% Calculator at “Don’t Quit Your day Job”.net The point being that in spite of wars, recessions, disasters and market debacles, a consistent, steady and disciplined approach to investing is a proven road towards building a substantial nest egg. To be sure, the road is not paved smooth. However, as long as the investor sets a minimum monthly or quarterly allocation, called dollar cost averaging, and reinvests the dividends, the end result will be well worth the effort. New investors are fortunate because it hasn’t been until relatively recently when an individual investor was able to invest in an entire index, let alone with deeply discount commissions and fractional shares. ‘Back in the day’ commissions may have cost upwards of $150.00 for a small ’round-lot’. ‘Odd-lots’, (less than 100 shares) or fractional shares were handled by specialized brokerage houses for an additional fee, of course. Those days are long gone! Now, with deeply discounted commissions and a technology with which round lots, odd lots, fractional shares are traded with a single mouse click, the door is open to everyone with the ambition to go-it-alone. Further, automatic purchases and automatic dividend reinvestments are pretty much a standard option and make the entire process ‘forget proof’. It should be noted that the Dow Jones Industrial Average was created in 1896 in order to provide investors with a reasonably accurate measure of the overall market direction and it served well for nearly a century. There are only 30 members of ‘the Dow’ industrials and although it’s the market number that catches everyone’s ear, it is no longer the very best indication of equity market ups and downs. However, what it still does represent is an exclusive club of well-established blue chip American companies. It is the ideal venue for those just entering the market that might yet to have gained the experience and understanding of market analysis or the implications of macroeconomic data. In other words, an investor may start with very little experience or knowledge with the Dow. In fact, there is a straight forward, plain vanilla Exchange Traded Fund (ETF) offered by State Street Global Advisors : the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ). DIA sometimes called the ‘Dow Diamonds’: … seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average… The Dow Jones Industrial Average (DJIA) is a price weighted average. This means that the price of each component is added up and then divided by the number of components. Now, to be sure, changes were made as time went by and companies were removed or added as their relevance to the economy changed. In order to preserve the continuity of the average, the Dow divisor must be adjusted along with new components. The current divisor is 0.14967727343149. Indeed, the sum of the prices of each component as of the close of trading on Friday, September 4th works out to 2410.16. Dividing that sum by the divisor results in: (2410.16)/ (0.14967727343149) = 16,102.386; precisely Friday’s closing average! According to the prospectus the weight of each stock in the fund’s portfolio ‘substantially corresponds’ to the weight of each Dow component; the fund distributes dividends monthly. The fund itself first traded in January of 1998. Its Gross Expense ratio is low, at 0.17%. The fund notes 31 holdings, the Dow 30 plus a cash position (as do most funds). It might seem frivolous to the experienced investor, but for the sake of completeness each component is tabled below and since price matters in this average, the September 4th closing price is included. Name Close, 9-4-2015 Name Close, 9-4-2015 Name Close, 9-4-2015 Goldman Sachs (NYSE: GS ) $108.38 McDonald’s (NYSE: MCD ) $94.85 JP Morgan Chase JPM $61.50 IBM (NYSE: IBM ) $143.70 Johnson & Johnson (NYSE: JNJ ) $91.13 Merck (NYSE: MRK ) $51.59 3M (NYSE: MMM ) $139.84 United Technologies (NYSE: UTX ) $90.68 Du Pont (NYSE: DD ) $48.60 Boeing (NYSE: BA ) $129.76 Chevron (NYSE: CVX ) $76.67 Verizon (NYSE: VZ ) $44.82 Home Depot (NYSE: HD ) $114.42 American Express (NYSE: AXP ) $74.08 Microsoft (MST) $42.61 UnitedHealth (NYSE: UNH ) $112.36 Caterpillar (NYSE: CAT ) $73.10 Coca-Cola (NYSE: KO ) $38.52 Nike (NYSE: NKE ) $109.69 Exxon Mobil (NYSE: XOM ) $72.46 Pfizer (NYSE: PFE ) $31.37 Apple (NASDAQ: AAPL ) $109.42 Visa (NYSE: V ) $69.16 Intel (NASDAQ: INTC ) $28.52 Disney (NYSE: DIS ) $100.97 Proctor & Gamble (NYSE: PG ) $68.76 Cisco (NASDAQ: CSCO ) $25.52 Travelers (NYSE: TRV ) $97.76 Wal-Mart (NYSE: WMT ) $63.89 General Electric (NYSE: GE ) $24.00 Closing Prices Dow Components, September 4th CNNMoney Since this is a price weighted average, it’s interesting to see at a glance heaviest to least weighted by price in the chart below. (click to enlarge) ( Data from State Street Global Advisors) It’s also worth noting that the DJIA yield is 2.69%, the fund yield is 2.48% and the fund yield less expenses is 2.46%. Since its inception in January of 1998, the fund has an annualized yield of 7.08%. As mentioned above, the fund closely replicates the DJIA; hence the sector allocation of the fund demonstrated in the chart below is nearly identical to the sector allocation of the DJIA. The fund’s net assets are approximately $11 billion. The current index P/E is 15.44, about average and the price of the index is 10.15 times its cash flow. The ETF is currently trading at a discount to its Net Asset Value; i.e., the ETF market cap is slightly less than the Net Asset Value (NAV) of its holdings. The key point to keep in mind is that the Dow Jones Industrial Average no longer serves as the ‘must have market indicator’ but it does reflect the essential composition of the U.S. economy by premier U.S. companies in each market sector. Recently, equity markets have been unraveling because of uncertainty in global growth expectation. For those who, in the course of the day might happen to catch a word about the “Dow Industrials” having lost some frightening number of ‘points’, and hearing market pundits casting dire warnings about days to come, then that should serve as a signal that this is the day to start investing for the future. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.