attack my high-yield investing

[Alex in Virginia]

Do you build detailed financial models for the companies you invest in? Do you talk to the investor relations people at the companies you are investigating? Talk to suppliers, competitors, customers, etc.? Build cashflow models for junk bond issuers? Do you update these models at least quarterly?

In my experience, there are really two kinds of investment opportunities: ones that require very little real digging (since they are way too cheap and it is obvious), and those that require very extensive, painful digging.

Please, Brewer, why must you have such an angry tone with me when I'm just trying to have a constructive conversation, and hopefully learn something?

Let's just talk, OK?

I asked you to please tell me what you do. You do all that? Talk to competitors and customers of every company you might invest some money in? Build detailed cash flow models? Okay, fine, you do.

We still don't know what financial metrics and other fundamentals you use to screen companies to determine whether they meet with your approval. We don't know what ratio thresholds or passing levels you look for to declare a company acceptable. Could you please, please let us in on your approach, given that you see mine as simplistic and clueless?

Thanks...

Alex in Virginia

 

[Sarah in SC]

In my experience, there are really two kinds of investment opportunities: ones that require very little real digging (since they are way too cheap and it is obvious), and those that require very extensive, painful digging.

+1 and very nicely stated, Brew.

 

[Texas Proud]

Alright, I'll take another stab at this. I saw it stated that GM, Chrysler, and AIG were quality companies.

GM: In 2007, GM had a negative profit margin. Today, they are barely profitably. Chrysler: Also almost non-existent profit margin in the mid 2000's.
AIG: Losing money throughout the same time period.

So yes, if these are considered quality stocks, you will get burned. I think that is why many people have such a negative opinion of stocks; they simply don't understand what qualifies as a quality stock.

I did not say they were quality companies, but they were not in the junk category..... also, most did pretty well prior to the meltdown...

AIG made $15 billion in 06 and $9 billion in 07.... don't know how that is losing money...

GM made $2.2 billion in 06 and lost $23 million in 07

I see you left out Citi.... they made $21.5 billion in 06 and $3.6 billion in 07...

Chrysler was not independent back then, and I agree it was not a great company, but was probably a 'high yield' company...

I did not include any of the wall street firms that actually went completely under or had to scale back dividends big time....


My point was... nobody knows what is going to happen to any company that is paying 'high yields'....

 

[Htown Harry]

My point was... nobody knows what is going to happen to any company that is paying 'high yields'....

I agree that is the concern. The point can be made in another way, by using aggregate statistics rather than individual examples:

In the 2008 downturn, 142 dividend-paying stocks cut their dividends.

List of Stocks That Lowered Their Dividends in 2008 | Dividend.com

 

[Texas Proud]

Please, Brewer, why must you have such an angry tone with me when I'm just trying to have a constructive conversation, and hopefully learn something?

Let's just talk, OK?

I asked you to please tell me what you do. You do all that? Talk to competitors and customers of every company you might invest some money in? Build detailed cash flow models? Okay, fine, you do.

We still don't know what financial metrics and other fundamentals you use to screen companies to determine whether they meet with your approval. We don't know what ratio thresholds or passing levels you look for to declare a company acceptable. Could you please, please let us in on your approach, given that you see mine as simplistic and clueless?

Thanks...

Alex in Virginia

Just as an FYI.... I used to work with a guy who left where I worked to go work at Enron.... he said Enron is a no brainer investment and was putting a lot of money in the stock... he was smart, and also knew about risks, but it was working for him at the time... he lost a lot because it was in the 401(k) which got locked up when the stock started the dive (who knows if he would have sold because he was a true believer)....


All people here are saying is you are missing the risk/reward ratio in this investment style... it has worked for you so far, like the Enron investment for my friend... until it hits the bad cycle... (and I am not trying to compare your risk with a big investment in one stock, this is just an example of someone saying it is a great investment method when others say it is a potential disaster)....

I also have not seen anybody tell you not to do what you are doing.... (heck, most say good luck to you).... just that you seem to be coming here telling smart people that YOUR way is so much better than their way.... that is like saying everybody here is dumb unless they do as you do....

My last comment I got from an Eco professor when I asked him to get me some talking points to someone who believed the gold standard would actually work... he asked me 'does he really believe in the gold standard'... I said 'yes'.... he said 'there is nothing you can say to change his mind' and he walked off..... SO, like my friend who believes in the gold standard, you believe in what you are doing and NOBODY will be able to change your mind.... you drank the cool-aid and will defend it to the end...

Again, I hope it works out for you and the event that makes it a bad investment theory does not happen when you are still living....

 

[vxp036000]

I don't make money from dividends. Heck, I don't even hold onto a stock long enough to collect a dividend. Most times I sell a stock within several hours of buying.

I understand there is a risk when there is a downturn. That is a given. Which is why I sell at the first sign of a downturn. I have a stop loss based on time, trend, public perception, etc. It has saved me on more than one occasion.

I would also like to point out that the highly revered Vanguard funds also suffer from downturns. VTIAX dropped by roughly 20 % at the end of 2011. I didn't lose a thing in that downturn; instead, I was up by 5%. I could cherry pick plenty of other examples just as you all have done with stocks. The point is, I get out of any downturn before it really comes to bite. I think it would be quite easy to show that my active investment strategy is roughly the same risk, and higher yield than any passive investment.

I agree that is the concern. The point can be made in another way, by using aggregate statistics rather than individual examples:

In the 2008 downturn, 142 dividend-paying stocks cut their dividends.

List of Stocks That Lowered Their Dividends in 2008 | Dividend.com

 

[growing_older]

I don't make money from dividends. Heck, I don't even hold onto a stock long enough to collect a dividend. Most times I sell a stock within several hours of buying.

So your "high-dividend" screen is used to find candidate stocks to day trade? Now, I'm even more confused.

 

[photoguy]

Given the large body of research that shows active investing is a "loser's game", I'd be quite interested if you could follow-up on your claim below with solid evidence/actual quantitative numbers.

I think it would be quite easy to show that my active investment strategy is roughly the same risk, and higher yield than any passive investment.

 

[vxp036000]

When I say high yield, I refer to high yield investment strategy. There is another poster that relies on dividends, but I strictly trade stock. I would also hesitate to use the term day trade, because it generally refers to unconditionally selling all your holdings before the market close. That is not really true for my style of trading. Sorry for the confusion.

So your "high-dividend" screen is used to find candidate stocks to day trade? Now, I'm even more confused.

 

[vxp036000]

Well, for most people, active investing is a losers game. No argument there. I wouldn't be surprised if less than 10 % of active investors actually return a profit. The difference is that those 10 % spent substantial time and effort to put together a profitable strategy, after likely having been burned a few times.

I can throw out hard numbers, but you still won't be convinced. I calculated that I'm up 16% from Aug 1, 2011. VTIAX is down 7 % from Aug 1, 2011. How many examples do you want?

Given the large body of research that shows active investing is a "loser's game", I'd be quite interested if you could follow-up on your claim below with solid evidence/actual quantitative numbers.

 

[Ready-4-ER-at-14]

There are a whole bunch of ideas floating around in my brain when I read this rather long thread.

Volatility is enhanced with risk, so if you search for stock that are volatile based on the dividend yield, you have a stock that has a positive cash flow even if from some windfall.

Robert Lichello worked on volatility engines for mutual funds that I have used for stock holdings. Basically you switch from cash to stock depending on which was overvalued. And overvalued just meant moving more than a certain % in a period of time. It was an agressive dollar cost averaging that sold some of the winnings to have cash for a buy at last dip.

I used that on one stock that lost say 40% in value (did not pay dividends) and ended up net down like 10%.

I back tested this idea on maybe a dozen stock from sp500 for a period of 10-20 years. Some were no longer trading, or changed somehow. But for the ones i could track and still around, a few went down, most limped along, one did nothing but go up and this method underperformed. A few went up gradually with up and downs and the method way overperformed the sp500 returns.

If this person is simply trend trading using volatile stock, he is EARNING an income rather than passive income.

 

[REWahoo]

This thread illustrates one part of a recurring cycle:

1. When markets are good for a couple of years or more, posters show up to share the good news that they've developed what appears to them to be a sure-fire system of active trading. They can garner XX% returns regardless of what the market does based on their investment analysis criteria and a set of rules on when to buy and when to sell.

2. When markets go bad, posters come along to share the good news they saw it coming - it was as plain as the nose on your face, even an idiot should have recognized the looming downturn. They got out of the market at the top and are sitting on the sidelines, fat and happy, awaiting the bottom so they can jump back in.

3. The posters in the first group are entirely different from the posters in the second group.

Predictable as the phases of the moon...

 

[Major Tom]

I can throw out hard numbers, but you still won't be convinced. I calculated that I'm up 16% from Aug 1, 2011. VTIAX is down 7 % from Aug 1, 2011. How many examples do you want?

As a passive index investor I am mostly sitting on the sidelines on this thread, but I think that if you were able to quote your results after having been doing this for 10-15 years or more, that would really count for something.

 

[vxp036000]

Where did I state that I will return X % regardless of the market? It is plain to everyone here that there is no sure-fire way of active trading. It should also be obvious that the same applies to passive trading. But, as an active trader and clearly a minority here, for me active trading has less risk and better return than any passive investment. I also know several other folks with active investment strategies, whether through DRIPing dividends, trading stocks, etc. Of course, everyone is completely amazed that it works, they should have blown up their account years ago, etc. Like I mentioned previously, while the majority of folks WILL lose big with this approach, don't generalize that to the few of us that actually have succeeded thus far.

This thread illustrates one part of a recurring cycle:

1. When markets are good for a couple of years or more, posters show up to share the good news that they've developed what appears to them to be a sure-fire system of active trading. They can garner XX% returns regardless of what the market does based on their investment analysis criteria and a set of rules on when to buy and when to sell.

2. When markets go bad, posters come along to share the good news they saw it coming - it was as plain as the nose on your face, even an idiot should have recognized the looming downturn. They got out of the market at the top and are sitting on the sidelines, fat and happy, awaiting the bottom so they can jump back in.

3. The posters in the first group are entirely different from the posters in the second group.

Predictable as the phases of the moon...

 

[vxp036000]

No, I have not been trading like this for 10-15 years, so my experience clearly doesn't mean much in your eyes. I do have friends that have actively traded stocks for 20 years or more, starting with a whopping $20k or so. Now they are multi-millionaires. I can also show you just as many that lost all their money from trading. I try to learn from the folks that failed as well as my own mistakes, that fortunately have not burned me too badly.

As a passive index investor I am mostly sitting on the sidelines on this thread, but I think that if you were able to quote your results after having been doing this for 10-15 years or more, that would really count for something.

 

[REWahoo]

... don't generalize that to the few of us that actually have succeeded thus far.

I will give you credit for including the 'thus far'. Reminds me of the very old joke about the guy who fell off a 40 story building and as he passed the 20th floor was heard to say, 'so far, so good'.

Maybe I missed it but when did you start using your system - was it prior to 2007?

 

[vxp036000]

I started beginning of 07. I have been through a few down turns, yes. And remarkably came out unscathed. Yep, it should have been impossible to know when to get out

I will give you credit for including the 'thus far'. Reminds me of the very old joke about the guy who fell off a 40 story building and as he passed the 20th floor was heard to say, 'so far, so good'.

Maybe I missed it but when did you start using your system - was it prior to 2007?

 

[obgyn65]

I am one of the most conservative participants here. I get nervous when I read the words 'high-yield investment approach". I would not try it, whatever it is.

For almost 4 years, I have invested my IRA funds only in high-yield dividend stocks. When I started, I set a minimum of 6% yield, but in practice I have been operating on a minimum 8 - 8.5% yield for the last 3+ years. Over the last 6 months, I have begun shifting some money into bonds, but again only high yield (10% or better).
.

 

[Major Tom]

I am one of the most conservative participants here. I get nervous when I read the words 'high-yield investment approach". I would not try it, whatever it is.

Yes obgyn - of all the people here, you are the very last person I would think of in connection with this particular investing style

 

[JPatrick]

I started beginning of 07. I have been through a few down turns, yes. And remarkably came out unscathed. Yep, it should have been impossible to know when to get out

Whether you meant possible or impossible, you, very well may be your best sign..

 

[vxp036000]

So you basically DRIP dividends, hopefully spread across multiple companies / sectors? I've been thinking about doing the something similar with the excessive cash I have accumulating nothing in a bank. I'd be scared to touch high yeild bonds; it seems a little risky.

For almost 4 years, I have invested my IRA funds only in high-yield dividend stocks. When I started, I set a minimum of 6% yield, but in practice I have been operating on a minimum 8 - 8.5% yield for the last 3+ years. Over the last 6 months, I have begun shifting some money into bonds, but again only high yield (10% or better).
Thanks.

 

[NW-Bound]

I would not try it, whatever it is.

Fear is good. A lot of time, fear will protect you.

Greed can be good, but greed quite often get you bankrupt pretty fast.

 

[brewer12345]

Please, Brewer, why must you have such an angry tone with me when I'm just trying to have a constructive conversation, and hopefully learn something?

Let's just talk, OK?

I asked you to please tell me what you do. You do all that? Talk to competitors and customers of every company you might invest some money in? Build detailed cash flow models? Okay, fine, you do.

We still don't know what financial metrics and other fundamentals you use to screen companies to determine whether they meet with your approval. We don't know what ratio thresholds or passing levels you look for to declare a company acceptable. Could you please, please let us in on your approach, given that you see mine as simplistic and clueless?

Thanks...

Alex in Virginia

Your thread has been hijacked by a[-]nother[/-] troll, so you are getting some of his static as well as your own.

I am not angry or hostile, but my patience is being tried. It is becoming clear that you are some kind of daytrader, which 99.99999% of the people on this board are not. I personally am a dyed in the wool deep value investor and my holding periods are usually measured in years. I think we have little to discuss, given that neither of us is likely to convert the other. Good luck and watch your six: if you make a mistake the losses are all yours.

 

[photoguy]

I can throw out hard numbers, but you still won't be convinced. I calculated that I'm up 16% from Aug 1, 2011. VTIAX is down 7 % from Aug 1, 2011. How many examples do you want?

Your anecdote is supremely convincing!

On a serious note though, you would need to show that your strategy delivers excess return (or whatever measure you want to optimize) when you account for (1) random variation (including the issue of multiple hypothesis testing/survivorship bias) and (2) proper adjustment of risk levels. If you look on bogleheads or even pick up some finance papers, you can probably find some examples of how to do this.

It's actually not very easy unless you are comfortable with statistical model building. But that is the level of analysis needed given the mountains of evidence against active investing.

 

[Alan]

When I say high yield, I refer to high yield investment strategy. There is another poster that relies on dividends, but I strictly trade stock. I would also hesitate to use the term day trade, because it generally refers to unconditionally selling all your holdings before the market close. That is not really true for my style of trading. Sorry for the confusion.

I can throw out hard numbers, but you still won't be convinced. I calculated that I'm up 16% from Aug 1, 2011. VTIAX is down 7 % from Aug 1, 2011. How many examples do you want?

Why are you comparing your returns to an international stock index?