Tag Archives: pro

Where The Smart Money Is Investing

When it comes to investing, there are no bonus points for originality. Returns are returns, regardless of whether the trade was your idea or a hot tip from your brother-in-law. The good news is that the SEC makes available far better trading moves than those of your brother-in-law. Large institutional investors are required to disclose their portfolio holdings at least quarterly, giving the investing public a chance to look over their shoulders. You don’t want to mindlessly ape another investor’s moves because you have no way of knowing their rationale for buying or selling. But it never hurts to see how your own portfolio stacks up against some of the best in the business. So with that said, let’s take a look at the asset allocations of three managers that have left the competition in the dust over their long careers. I’ll start with Baupost Capital’s Seth Klarman, a man whose reputation in value investor circles makes him close to demigod status. Klarman runs a multi-billion-dollar portfolio with just 40 stocks in it. That’s how confident he is in his picks. So, what is Mr. Klarman betting on? Try energy. Lots of energy. 39% of his portfolio was invested in energy as of quarter end with nearly half of that amount in a single stock. It’s worth noting here that Klarman isn’t betting on the price of oil rising or on “Big Oil” stocks in general. His bet is a targeted one on liquefied natural gas exportation. But it goes to show that, even in a full-blown crisis, there can be pockets of opportunity. Next, let’s take a look at Dan Loeb, principal of hedge fund Third Point. Loeb is not a passive investor. He’s a notorious activist investor known for taking large stakes in companies and then agitating for major change. You and I don’t have that kind of power, but we can still take a peek over his shoulder and see where he sees the most value. Today, it’s in healthcare. About 40% of his portfolio is currently invested in health and biotech stocks. I don’t have the stomach to invest 40% of my portfolio in the volatile biotech sector. But my good friend Ben Benoy is something of an expert on the matter. And finally, we get to Mohnish Pabrai , a well-respected value investor and the author of one of my favorite books on investing, The Dhandho Investor . Pabrai runs the most concentrated portfolio I have ever seen among large managers. He has just seven stocks in his portfolio, and global auto stocks make up nearly 70% of the total. Longer term, autos are a bad bet. Demographic trends suggest that, at least in the US and Europe, auto sales are looking at a major reduction in demand. But any stock can be an interesting short-term opportunity if priced right, and Pabrai is currently showing a handsome profit on the trade. So, what’s the takeaway here? Buy energy, biotech and auto stocks? Not exactly. For all we know, these superinvestors might dump these stocks tomorrow… if they haven’t already (we typically get the ownership data on a 45-day lag). No, the takeaway is that it’s fine to bet big on a high-conviction trade if your system or research tells you to. You should have an exit strategy, of course, and you should be prepared to sell if your investing thesis fails to pan out. But don’t be afraid to bet big when the odds are in your favor. This article first appeared on Sizemore Insights as Where the Smart Money is Investing. Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

10 Ways To Destroy Your Portfolio

With the increased frequency of heightened volatility, investing has never been as challenging as it is today. However, the importance of investing has never been more crucial either, due to rising life expectancies, corrosive effects of inflation, and the uncertainty surrounding the sustainability of government programs like Social Security, Medicare, and pensions. If you are not wasting enough money from our structurally flawed and loosely regulated investment industry that is inundated with conflicts of interest, here are 10 additional ways to destroy your investment portfolio: #1. Watch and React to Sensationalist News Stories: Typically, strategists and pundits do a wonderful job of parroting the consensus du jour. With the advent of the internet, and 24/7 news cycles, it is difficult to not get caught up in the daily vicissitudes. However, the accuracy of the so-called media experts is no better than weather forecasters’ accuracy in predicting the weather three Saturdays from now at 10:23 a.m. Investors would be better served by listening to and learning from successful, seasoned veterans. #2. Invest for the Short Term and Attempt Market Timing: Investing is a marathon, and not a sprint, yet countless investors have the arrogance to believe they can time the market. A few get lucky and time the proper entry point, but the same investors often fail to time the appropriate exit point. The process works similarly in reverse, which hammers home the idea that you can be 200% wrong when you are constantly switching your portfolio positions. #3. Blindly Invest Without Knowing Fees: Like a dripping faucet, fees, transaction costs, taxes, and other charges may not be noticeable in the short-run, but combined, these portfolio expenses can be devastating in the long run. Whether you or your broker/advisor knowingly or unknowingly is churning your account, the practice should be immediately halted. Passive investment products and strategies like ETFs (Exchange Traded Funds), index funds, and low turnover (long time horizon / tax-efficient) investing strategies are the way to go for investors. #4. Use Technical Analysis as a Primary Strategy: Warren Buffett openly recognizes the problem with technical analysis as evidenced by his statement, “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.” Legendary fund manager Peter Lynch adds, “Charts are great for predicting the past.” Most indicators are about as helpful as astrology, but in rare instances some facets can serve as a useful device (like a Lob Wedge in golf). #5. Panic-Sell out of Fear And Panic-Buy out of Greed: Emotions can devastate portfolio returns when investors’ trading activity follows the herd in good times and bad. As the old saying goes, “Following the herd often leads to the slaughterhouse.” Gary Helms rightly identifies the role that overconfidence plays when in investing when he states, “If you have a great thought and write it down, it will look stupid 10 hours later.” The best investment returns are earned by traveling down the less followed path. Or as Rob Arnott describes, “In investing, what is comfortable is rarely profitable.” Get a broad range of opinions and continually test your investment thesis to make sure peer pressure is not driving key investment decisions. #6. Ignore Valuation and Yield: Valuation is like good pitching in baseball…very important. Valuation may not cause all of your investments to win, but this factor should be an integral part of your investment process. Successful investors think about valuation similarly to skilled sports handicappers. Steven Crist summed it up beautifully when he said, “There are no ‘good’ or ‘bad’ horses, just correctly- or incorrectly-priced ones.” The same principle applies to investments. Dividends and yields should not be overlooked – these elements are an essential part of an investor’s long-run total return. #7. Buy and Forget: “Buy-and-hold” is good for stocks that go up in price, and bad for stocks that go flat or decline in value. Wow, how deeply profound. As I have written in the past, there are always reasons of why you should not invest for the long term and instead sell your position, such as: 1) new competition; 2) cost pressures; 3) slowing growth; 4) management change; 5) excessive valuation; 6) change in industry regulation; 7) slowing economy; 8) loss of market share; 9) product obsolescence; 10) etc, etc, etc. You get the idea. #8. Over-Concentrate Your Portfolio: If you own a top-heavy portfolio with large weightings, sleeping at night can be challenging, and also force average investors to make bad decisions at the wrong times (i.e., buy high and sell low). While over-concentration can be risky, over-diversification can eat away at performance as well – owning a 100 different mutual funds is costly and inefficient. #9. Stuff Money Under Your Mattress: With interest rates at the lowest levels in a generation, stuffing money under the mattress in the form of CDs (Certificates of Deposit), money market accounts, and low-yielding Treasuries that are earning next to nothing is counter-productive for many investors. Compounding this problem is inflation, a silent killer that will quietly disintegrate your hard earned investment portfolio. In other words, a penny saved inefficiently will lead to a penny depreciating rapidly. #10. Forget Your Mistakes: Investing is difficult enough without naively repeating the same mistakes. As Albert Einstein said, “Insanity is doing the same thing, over and over again, but expecting different results.” Mistakes will be made and it behooves investors to document them and learn from them. Brushing your mistakes under the carpet may make you temporarily feel better emotionally, but will not help your financial returns. As the year approaches a close, do yourself a favor and evaluate whether you are committing any of these damaging habits. Investing is tough enough already, without adding further ways of destroying your portfolio. Disclosure: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Tax-Loss Season: A Guide To Finding Quality Stocks At Discount Prices

Despite a somewhat volatile year, stocks enter December just about where they rung in the year. However, 2015’s basically flatline performance represents the first year in the last four, where investors collectively won’t have robust gains to cheer about, assuming no massive rally before the ball drops. Even though the S&P 500 hasn’t wavered much until now, it is likely that do-it-yourselfers might be sitting on some substantial losses if they are holding certain stocks. Many marquee-name large-cap companies with household familiarity have taken it on the chin during 2015. Here is a sampling of stocks that have experienced a rather rough year, with their YTD returns as of the last day of November: Whole Foods (NASDAQ: WFM ) – down ~ 40% Wal-Mart (NYSE: WMT ) – down ~ 30% Nordstrom (NYSE: JWN ) – down ~ 30% IBM (NYSE: IBM ) – down ~ 14% Chevron (NYSE: CVX ) – down ~ 20% Procter & Gamble (NYSE: PG ) – down ~ 17% American Express (NYSE: AXP ) – down ~ 22% While now’s a good time to reassess one’s commitment to companies whose market values have tanked, it may also be a good time for those who don’t own them to consider adding them. Let’s look into why. Understanding Tax-Loss Selling As we approach the end of the year, it is common, if not likely, for stocks that have been roughed up during the year to experience even further, artificially inflated inspired, selling. Due to the calendar-year way in which Uncle Sam evaluates our capital gains and losses, most investors will try to balance out gains taken prior in the year with losses. Selling a stock that has depreciated since time of purchase is a sound way of decreasing one’s tax bill come April 15. Since most investors won’t wait until the last minute to do this, it is possible that we are in the midst of tax-loss-inspired selling right now. If I have a $2,000 gain in stock ABC that I sold back in May, but I have a $2,000 loss in IBM, I can sell IBM to offset the gain I took on ABC back in May. Holding period (greater or less than 1 year) will determine specifically how these gains and losses can be offset. And one’s tax bracket will determine the ultimate amount that an investor might have to pay on gains. In any case, taking the time to evaluate your personal capital gains situation is a savvy, necessary move come the end of the year. Tax-Loss Selling Strategies To avoid what’s known as the “wash sale” rule, and keep a position in a stock they like, some investors will “double down” on a losing position in November (or earlier), then sell half the position before the end of the year. The wash-sale rule prohibits the taking of a loss on any security which was purchased 30 days before or after the loss is taken. This strategy enables the investor to lock in the loss and keep the same position heading into the next year. Another strategy may be to agree to part ways with a losing stock, lock-in the loss, but immediately buy shares of another company that does business in the same space or that tends to trade in a similar manner. This is sometimes referred to as a stock swap or stock rotation. One might say, I’m done with Wal-Mart, a mass merchant, but rotate the sale funds over into a stock like Whole Foods, a food-focused retailer. Or the investor might decide retail looks miserable altogether, selling Wal-Mart as a result, then buying into a totally new sector. Whatever the decision, the goal is to minimize calendar year capital gains by December 31, limiting tax liability come April 15. Tax-Loss Buying Strategies Simply put, if a stock is getting hit unnecessarily come the end of the year, it may turn into a real bargain, even if it is experiencing some near-term problems. Alongside your holiday shopping list, make a list of some 2015 “losing” stocks you’d like to own, pick a buy point, set a buy-limit order, and hopefully get your order filled. If the stock looks like a bargain now, don’t wait – the sale may not last! While tax-loss season is generally focused on selling strategies, it’s the buyers that may have the most to gain out of tax-loss season! Original post .