Investing For the Medium Run

[haha]

The trouble is that none of these investments provide sufficient income unless you have very low income requirements or a very large portfolio.

Lets take a look at $1 Million invested conservatively in today environment

AA income
5 Year CD ladder 25% $4,000
10 yr TIPs 20% $2,800
30 yr TIPs 20% $4,400
Total Stock Mkt 35% $7,000
Total 100 $18,200

Even assuming zero inflation withdrawing 4% (or 3.5% for early retirees) while receiving income of under 2% leaves a pretty huge gap if we have another decade of flat equity returns.

Well, I don't want to play the "well what would you do card?" Overall this just is not an easy time to live on capital.

However, even another 10 years of flat markets does not mean that there won't be reasonable things to buy, or perhaps to sell, somewhere along the way.

Ha

 

[ERD50]

Even assuming zero inflation withdrawing 4% (or 3.5% for early retirees) while receiving income of under 2% leaves a pretty huge gap if we have another decade of flat equity returns.

I'm pretty sure that if you look at some of those FIRECALC runs, there would be portfolios that had to draw 2% of principle for a while, yet ended up in a happy place.

Of course, we don't know if this is one of those runs, or another one that ended poorly. As Ha said a few posts back:

Quitting work early is risky, so if we want to do it we should realize what we may encounter.

Ha

-ERD50

 

[clifp]

Well, I don't want to play the "well what would you do card?" Overall this just is not an easy time to live on capital.

However, even another 10 years of flat markets does not mean that there won't be reasonable things to buy, or perhaps to sell, somewhere along the way.

Ha

Well I suppose it is some constellation that even wise and sage investor like Ha Ha and others on the forum are having a difficult time. On the other hand I really was looking for an EASY BUTTON, and was hoping you could provide it. But "not easy" is a real understatement.

Even in Fall 2008 and last spring, when the financial system was collapsing, I was confident that high quality stocks were really undervalued and eventually fundamentals would triumph fear. Unfortunately, I was all in, with no cash left by Jan 2009 and could only watch as the cards were dealt last March.
The good news is that I and the numerous folks on the forum who didn't sale have been vindicated by the market rally in a very short time.

I find this environment to be the worse ever for investing, with some clearly overpriced assets, no under-priced assets, and cash paying nothing.

Buffett's advice that investing is different than baseball you don't have to swing at bad pitches certainly applies today. I just find it harder to sit and do nothing when Mr Bear Market and the Great Recession has put lots of runs on the board in the last few years.

 

[FIREd]

Well I suppose it is some constellation that even wise and sage investor like Ha Ha and others on the forum are having a difficult time. On the other hand I really was looking for an EASY BUTTON, and was hoping you could provide it. But "not easy" is a real understatement.

Even in Fall 2008 and last spring, when the financial system was collapsing, I was confident that high quality stocks were really undervalued and eventually fundamentals would triumph fear. Unfortunately, I was all in, with no cash left by Jan 2009 and could only watch as the cards were dealt last March.
The good news is that I and the numerous folks on the forum who didn't sale have been vindicated by the market rally in a very short time.

I find this environment to be the worse ever for investing, with some clearly overpriced assets, no under-priced assets, and cash paying nothing.

I agree. The only investment I have bought recently that I feel totally great about is i-bonds (even with a dismal real rate of only 0.3%!). I had another lump sum to invest today and I had to force myself to invest half of it in stocks because I had let my AA slip below 45% equities, but I kept the other half of it in cash (earning 0.8%) because I just didn't know what else to buy at this point.

In late 2008 / early 2009 I was pretty scared, but at least I saw some investments with appealing valuations and I had enough liquidity to double down on a few things which paid off handsomely when the market recovered. Now, I am more concerned about protecting those gains and I am willing to wait until better buying opportunities present themselves before putting the cash to work.

 

[NW-Bound]

...I am willing to wait until better buying opportunities present themselves before putting the cash to work.

Well, there have recently been "dancing" and wh*** postings.

You may get your chance soon.

Or not.

 

[Gone4Good]

My recent investment activities include:

1) Buying my first ever CD
2) Moving cash from money market funds to an on-line savings account
3) Buying 30yr TIPS at auction
4) Taking stock mutual fund dividends as distributions rather than reinvesting

5) At some future date - selling some stock to bring my allocation down to a lower target in accordance with a now lower planned withdrawal rate.

 

[unclemick]

1. Learn to speak a few words in Norwegian.
2. Stamp out any deep thinking.
3. Meditate on : Pssst Wellesley.

heh heh heh - this thread needs a little humor. For extra points you can look up the current SEC yield of said fund.

 

[audreyh1]

1. Learn to speak a few words in Norwegian.
2. Stamp out any deep thinking.
3. Meditate on : Pssst Wellesley.

heh heh heh - this thread needs a little humor. For extra points you can look up the current SEC yield of said fund.

Oh Mick! You do so broaden our perspective!

Audrey

P.S. I already looked it up yesterday and posted it for Midpack - 3.27%

 

[brewer12345]

Hmm, I guess I simply do not know what all the anxiety is about. Bonds look generously valued to me, but if you stay within 5 to 7 year maturities you can lock in a decent yield and go back to sleep for a while. Equities OTOH, look pretty attractive to me. You can buy very attractive companies at low multiples and in many cases get a pretty fair dividend yield at the same time. What, for example, is terrible about SYY at $28 and change? The thing is a juggernaut in its market with a stable balance sheet, solid cash flow generation and the ability to beat its smaller competitors to death in this environment (or buy them). There are many similar examples to point to. It appears to me that many companies agree with me because I note that merger activity (especially strategics) is starting to really ramp up.

BWTFDIK?

 

[clifp]

Hmm, I guess I simply do not know what all the anxiety is about. Bonds look generously valued to me, but if you stay within 5 to 7 year maturities you can lock in a decent yield and go back to sleep for a while. Equities OTOH, look pretty attractive to me. You can buy very attractive companies at low multiples and in many cases get a pretty fair dividend yield at the same time. What, for example, is terrible about SYY at $28 and change? The thing is a juggernaut in its market with a stable balance sheet, solid cash flow generation and the ability to beat its smaller competitors to death in this environment (or buy them). There are many similar examples to point to. It appears to me that many companies agree with me because I note that merger activity (especially strategics) is starting to really ramp up.

BWTFDIK?

Nothing wrong with Sysco I've owned it for a couple years and it is now a whole penny/share higher than when I bought it. I've collected a 3%+ dividend, which has been raised by a few pennies. While I agree its competitive strength is excellent, cutting back on restaurant meals is an obvious economy measure for many Americans and that will clearly impact SYY profits. The company has 15-16 P/E which while not outrageous isn't exactly cheap for a slow growing business.

Now I much prefer collecting Sysco 3.5% dividend which the company has consistently raised, to keeping the money in cash or say buying a 10 year Treasury bill at the same yield. But if the risky equity portion of your portfolio is only earning 3.5% in income and perhaps another 3-4% in capital gains you are looking at 7% total returns and only if the economy recovers in a reasonable fashion. It is hard to construct a portfolio that you can withdraw 4% a year from.

 

[brewer12345]

Now I much prefer collecting Sysco 3.5% dividend which the company has consistently raised, to keeping the money in cash or say buying a 10 year Treasury bill at the same yield. But if the risky equity portion of your portfolio is only earning 3.5% in income and perhaps another 3-4% in capital gains you are looking at 7% total returns and only if the economy recovers in a reasonable fashion. It is hard to construct a portfolio that you can withdraw 4% a year from.

Help me out here: you just outlined a portfolio that ears 7% a year and you can't figure out how it could suuport a 4% withdrawal?

 

[clifp]

Help me out here: you just outlined a portfolio that ears 7% a year and you can't figure out how it could suuport a 4% withdrawal?

I wasn't being clear but I am talking about the standard 4% inflation adjusted SWR. If we assume a normal 3% inflation rate (and obviously there is a decent risk that inflation could be much higher) . I figure a company like Sysco to increase dividends at rate equal to inflation and the stock price to keep pace with dividend payments. Thus SYY and similar companies can provide a real return of 3.5%. If you have a 50/50 AA that means that cash and fixed income need to generate the rest. They currently fall way short of that mark. Even if you move to 75/25 AA like mine it is really tough to construct a decent Growth and Income portfolio. Not to mention if we have a W shaped recovery the equities risk being punished again.

 

[brewer12345]

I wasn't being clear but I am talking that standard 4% inflation adjusted SWR. If we assume a normal 3% inflation rate (and obviously there is a decent risk that inflation could be much higher) . I figure on a company like Sysco to increase dividends at rate equal to inflation and the stock price to keep pace with dividend payments. Thus SYY and similar companies can provide a real return of 3.5%. If you have a 50/50 AA that means that cash and fixed income need to generate the rest. They currently fall way short of that mark. Even if you move to 75/25 AA like mine it is really tough to construct a decent Growth and Income portfolio. Not to mention if we have a W shaped recovery the equities risk being punished again.

As far as I can tell, 3% inflation is not even on the horizon on the moment. If and when it materializes, its hard to imagine that SYY won't be a major beneficiary (and so will lots of other compaines). And if your port spits 3.5% real over several decades, we would be talking baout a major historical anomaly vs. what similar portfolios have earned over long stretches of history.

 

[haha]

Hmm, I guess I simply do not know what all the anxiety is about. Bonds look generously valued to me, but if you stay within 5 to 7 year maturities you can lock in a decent yield and go back to sleep for a while. Equities OTOH, look pretty attractive to me. You can buy very attractive companies at low multiples and in many cases get a pretty fair dividend yield at the same time. What, for example, is terrible about SYY at $28 and change? The thing is a juggernaut in its market with a stable balance sheet, solid cash flow generation and the ability to beat its smaller competitors to death in this environment (or buy them). There are many similar examples to point to. It appears to me that many companies agree with me because I note that merger activity (especially strategics) is starting to really ramp up.

BWTFDIK?

You make a good case, Brewer. But Martin Whitman wrote in The Agressive Conservative Investor that the financial position of the security buyer is at least as important as the financial position of the security issuer. So as a retired non-pensioner I feel that I want to be shooting fish in a barrel or I don't plan to shoot. In the past, I always had opportunities to do that. Those days may be over, but they may not, and meanwhile I am not hurting myself much by keeping some powder dry. Equities really have not done much for close to 6 months.

Ha

 

[clifp]

You make a good case, Brewer. But Martin Whitman wrote in The Agressive Conservative Investor that the financial position of the security buyer is at least as important as the financial position of the security issuer. So as a retired non-pensioner I feel that I want to be shooting fish in a barrel or I don't plan to shoot. In the past, I always had opportunities to do that. Those days may be over, but they may not, and meanwhile I am not hurting myself much by keeping some powder dry. Equities really have not done much for close to 6 months.

In my case, I've found that I can miss fish in barrels. Case in point, I have touted the bank BB&T as great dividend stock many times. "it has paid dividends for more than 110 years, raised them for more than 20 years, and only cut them once by a penny during depression" was something I use to say. All of which was true right up until last spring when the dividend was chopped form .47 to .15. Now a .15 dividend is three times a typical post TARP bank stock, the stock is trading at $30 not far below my $35 purchase price and I think BB&T is worthy candidate for the least stupid bank in the last decade.
But alas it is still a stupid bank and my dividend check has gone from $1880/year to $600 and the prospects for earnings and dividend growth aren't great.

Back in 2007 BB&T made $3.14 returned 60% of that to share holders as dividend, was conservatively run, very well capitalized and the stock traded for $40 providing a 4.7% yield. In 2009, it earned 1/3 as much the dividend is 1/3, still conservatively run, but God knows how much dodgy debt on underwater residential and commercial properties are on its books. In 2007, BB&T at $40 was fish in barrel, in 2010 at $30 it is a sniper shoot.

I could do the same analysis for almost every stock in my portfolio. 3M same price today as 2007, yet it is earning 1/3 less, and has significant unfunded pension problems. KMP 2007 price $53 2010 price $65 revenue down 24% earning down 45%. Intel 2007 $19 2010 $21 revenue down 9% earnings down
35%. I know the market is forward looking but it seems like Mr. Market is predicting that a better than 2007 economy is just around the corner.

 

[TromboneAl]

Time for a quick pause in our doom and gloom to reflect on and appreciate our nice run-up of the last year.

OK, that's all. Back to worrying...
​

 

[Gone4Good]

Time for a quick pause in our doom and gloom to reflect on and appreciate our nice run-up of the last year.

Which is part of the reason I worry.

 

[RonBoyd]

Which is part of the reason I worry.

Yeah, as irrational as it is, I share the same concern.

 

[clifp]

Yeah, as irrational as it is, I share the same concern.

Not irrational at all. The economic future of the country doesn't look 70% better today than it did a year ago.

On the other hand, they say that Market climbs a wall of worry. So we are just doing our part in building in that wall.

 

[brewer12345]

Not irrational at all. The economic future of the country doesn't look 70% better today than it did a year ago.

It doesn't? As I recall, a year ago people (who were devoid of tinfoil helmets) were seriously speculating whether the feddle gummint was about to nationalize several of the largest banks, for example.

 

[Gone4Good]

It doesn't? As I recall, a year ago people (who were devoid of tinfoil helmets) were seriously speculating whether the feddle gummint was about to nationalize several of the largest banks, for example.

I agree that things are much better than they were 1 year ago. Certainly a major rally off of 2009 March lows is warranted. As I remember it, my worry at the time wasn't so much that the banking system would be nationalized, but rather that the "Let them all fail" crowd (some of whom are poking around on these boards) would carry the day. Very scary times.

So an SPX well north of 666 is warranted. But risk premiums in both the equity and debt markets seem pretty low for the risks that still face the economy.

 

[brewer12345]

So an SPX well north of 666 is warranted. But risk premiums in both the equity and debt markets seem extraordinarily low for the risks that still face the economy.

Perhaps, perhaps not. I think corporate credit spreads are getting o the point of not-so-great compensation for underlying risks, although we are far from the inifinitesimal spreads of 2006-2007. Equity premia, I am not sure I agree that they are too low. I see plenty of firms that are priced at very wide discounts to their present condition and future prospects.

 

[Gone4Good]

I see plenty of firms that are priced at very wide discounts to their present condition and future prospects.

That maybe true. But at the macro level I see the S&P pricing at a trailing PE of ~18x and small cap stocks north of 30x. And then I see 10% unemployment and a whole host of economic uncertainties, I think to myself "these markets should be cheaper".

 

[clifp]

It doesn't? As I recall, a year ago people (who were devoid of tinfoil helmets) were seriously speculating whether the feddle gummint was about to nationalize several of the largest banks, for example.

If you are talking about the Oct 2008 to Jan 2009, than I agree the economic conditions were bad and the future looked even worse. However by March 2009, when the market hit bottom, the prospects were much improved, and the "we are doomed talk" was once again primarily from the tinfoil brigade. Here is a timeline from the NY Fed. Note that tomorrow is the 1 year anniversary of Bernake's talking about green shoots.

Clearly last year the market was crazily undervalued and you and I were in the camp saying "don't sell, buy". But we've had a heck of a rally in the last year. Now when I do a bottom up comparison of most of my portfolio companies, and I look at price, sales, current and future P/E compared to 3 or 5 years ago they look overvalued. There are exceptions, SYY being one and JNJ being a second.

IMO, the market on absolute basis looks fairly or slightly overvalued compared to historical levels. Stocks don't exist in a vacuum. On a relative basis compared to cash, bonds, gold, real estate, stocks look reasonably cheap. Which means that I continue to be fully invested, with less bonds and more cash than normal, but I am not happy camper. Which is why I've been whining like prima dona for the last few months...

 

[audreyh1]

That maybe true. But at the macro level I see the S&P pricing at a trailing PE of ~18x and small cap stocks north of 30x. And then I see 10% unemployment and a whole host of economic uncertainties, I think to myself "these markets should be cheaper".

The high unemployment rate may limit economic expansion, but I don't see it adversely affecting company profitability.

Audrey