PZD

Let me start by giving you some context for the decision to invest in the InvescoPowerShares Cleantech Portfolio (PZD). It was our first month to invest in energy, and we were looking at a set of companies, which had a sort of slimy feel. BP, and ExxonMobil, were both on the table, as was world’s largest oil tanker company Frontline.

In addition to those oil companies, we were considering PZD an index fund of Cleantech companies. That is defined as “a company to be a cleantech company if it derives at least 50% of its revenues or operating profits from cleantech businesses. Cleantech businesses are defined as those that provide knowledge-based products (or services) that add economic value by reducing cost and raising productivity and/or product performance, while reducing the consumption of resources and the negative impact on the environment and public health.”

Some of our members who will remain nameless felt a little queasy about investing in evil crude oil refinery, or transport, on the other hand we were all excited by the giant dividends paid by Frontline. In the end we decided to split the investment.

Frontline the Frontrunner

The first (and last) thing I ever learned about Frontline, Ltd is that it pays a huge dividend.

I had first seen the oil tanker company mentioned in an article concerning companies that have historically paid disproportionate dividends. The premise of the article was that high-performance companies with high dividend ratios can set you up with a nice retirement assuming you are investing a considerable amount. If the company’s generosity pays off and its share price rises, the investment essentially becomes a “high-yield” fixed income security with an ever increasing principal payment due at its ”maturity date”– which you get to decide! Not to mention the fact that qualified dividends  (though Frontline– being an international company– unfortunately wouldn’t qualify) are taxed at a lower rate than interest payments.

Above are our two current positions for FRO (these figures do not take dividends into account.)

Though our initial position represents a measly 4.68% of our invested funds, seven-month 30.2% unrealized gains are impossible to ignore. How’s that for inflation protection on a fixed income security!

To dump your money into every Tom, Dick, and Harry that offers a 10+% dividend yield would be foolish, but if it looks like the company can afford to pay the dividend for the foreseeable future it would be foolish not to jump on the train.

With the way that Frontline has been blowing the S&P out, unfortunately its dividend yields (only for potential new lots, of course) will diminish. For this reason, I am glad that even in my absence we decided to the opportunity to invest a full month’s share in FRO for August 2008 while we can still take advantage of above-average income yields. Needless to say, in the future we should keep our eyes peeled for similar opportunities in other sectors.

8/6/08 meeting minutes

Columbus Dividends meeting minutes for August 6, 2008

- 3 members absent

- Investments considered for High Risk: Transportation

o Union Pacific

o Tata Motors (to be revisited)

o Honda

o Frontline

- Final choice to invest for August: Frontline

- Annual meeting beginning of September

- Fiscal year ends September 1

- As of 8/6/08 the club was up .84%

Blind Buying: Hey… It works in the world of fragrance!

Sometimes, as Jim Cramer stated on his daily CNBC show, you have to close your eyes and buy.

 

If you are a religious “Mad Money” viewer, you may point out that Cramer offered this advice quite a while back in a bull market. He was implying that even though everything was overvalued, investors should still ‘get their bull on’. Stocks were moving higher, and to miss out on the potential gains for the sake of rational thinking would be…well, quite irrational.

 

This is essentially the strategy we have employed for the last eleven months (though due more to inexperience and club guidelines than to any type of allocation strategy). If the Dow drops 100 or comes up 70, we buy every month… like clockwork. No sales, no short sales, certainly no Iron Condor option spreads. I don’t know if Mike closes his eyes when he clicks buy on our TradeKing page, but for argument’s sake let’s imagine he does.

 

Cramer could rationally offer the same advice in this market, as he could in the market a year ago. Conventional wisdom tells us that: if you will live to see the profits from blind investment during a period of uncertainty, you won’t regret your decision (as long as you diversify). Looking at historic returns, if we keep working our current strategy, we won’t regret putting our money in for the long term. No two decade period has lost investors money (in net), not even periods that included ’29, the great depression and WWII.

 

Are there losses to be saved by holding off on our blind buy strategy during this downturn? Maybe. A good argument could be made for holding off… especially during our safe spot months. If your name is VTI and your job is to track the S&P, for the foreseeable future, providing the same mediocre returns as the market as a whole isn’t exactly outside of your job description. At least through the end of the year, a better safe spot could be found at our local mattress retailer.

When it comes to individual companies, however, I think we have some faith on our research. If market conditions prevent decent returns with our current strategy, we wouldn’t have sizable (though unrealized) gains through companies like V and FRO on our books.

 

Rather than attempting to time the moment when the market bottoms out, which it may already have, I think our focus should be on finding more winners. Wall Street analysts are suggesting that pharmaceuticals (as a whole sector) should perform well in the near future. Perhaps we should try that sector again, maybe in lieu of the next scheduled time when we flush our money down the S&P toilet.

 

Let me know what you think…

My justification of our biggest blunder to date:

So, the second time we were choosing an individual company it was supposed to be a higher risk area, so we went with pharmaceutical companies. In retrospect this was probably a pretty good sector to tackle early, not on a chemical level, but in terms of business model these are easy companies to understand. They raise capital, do research, and then if a product works they make a ton of money from it funding dividends, and additional research.

 

The big companies we considered like Pfizer, and Eli Lilly have numerous patents on drugs that are making them a ton of money, but that in cycles will expire and the performance of the stock will be based on how good a job they do of replacing those products with new ones. Smaller companies in this vain are working on a single product, and if it works who knows what they will do (like Mannkind).

 

In the end we decided to split our investment between MGI Pharma (which I will write about later), and Pfizer. Pfizer was meant as a hedge against the riskier investment, due to its age, size, and historic significance. As of now Pfizer is our worst investment, and the only thing I can really say in its favor is that it was a smaller one. It has paid a nice dividend, and seems set to continue to, but its shares have suffered.

 

A product lineup which included Lipitor, Diflucan, Zithromax, Viagra, and Celebrex were big influences on our decision, in addition to some quick interviews I did with some friends of mine in the medical profession (who prescribe these drugs more than other companies’ drugs). It may still work out for us though, any of their current projects of which they always have many could turn into the next Viagra, or Lipitor. If it does you’ll start to see that per share price rise in addition to the generous dividend, however if their research hits snags, or the drugs they produce don’t catch on, we could eventually see the dividend dropped, while the stock price continues to fall.

AAPL: What could have been… and what can be.

Jason’s VTI post brings to mind a time when I, half-jokingly, told him that out “safe-spot” could be Apple Computers. It seemed like a great idea at the time, back in the fall when Apple and Google seemed to have no ceiling and it seemed foolish not to get on the late 2000’s super-tech company train. Looks like Jason was right about VTI being the way to go… in the unlikely circumstance that we would have invested in AAPL four times, we would have taken 4x the hit that this company has handed us.

 

It sounds foolish (like I may be giving myself an excuse for being so gung ho on AAPL) but the good/bad news is that a decent amount of the drop hasn’t been balance sheet related. Back in 2004, Steve Jobs had a touch of the… err, pancreatic cancer and the company conveniently forgot to tell investors. Not that this is illegal (the SEC ruled that officers’ health was not an essential factor for disclosure) but it should be! Here we are in mid-2008 and Jobs’s health is again in question. The result? A smaller scale (and certainly less rational) version of the same type of uncertainty that has weighed down the financials ever since the Bear Stearns collapse.

 

Call me crazy, but I think it’s ridiculous that news, or rather a lack thereof, regarding Jobs’s health and small iPhone glitches should have such sharp effect on a solid company. I think we are beyond the point where Apple Computers would be considered a speculative investment. Products like the iPod, iPhone, and MacBook have established themselves as “bare necessities” to a large group of American teenagers and 20-somethings, creating steadily increasing earnings figures for Jobs’s cult computer company.

 

Even so, in this fearful market, there may be reason for concern… and concern (while quite concering!) can always be flipped into profit. Bear with me here:

 

Imagine Steve Jobs’s health is a legitimate concern. Let’s be honest, with the way Apple execs sidestepped questions regarding this pivotal issue during a quarterly conference call, it’s not a big stretch. We sell now, avoiding the TREMENDOUS hit that AAPL would absorb after an announcement that Jobs may be stepping down due to health concerns. Regardless of whether or not we buy back into AAPL a few months down the road after it settles in at a more stable price, we miss out on a possibly huge setback in working our way back even on this investment.

 

Just a suggestion, but I think it could be a while until we see AAPL hit 200 again. I don’t know about you, but when it happens I’d prefer to have more shares.

Let’s Start at the Beginning, a Very Good Place to Start

One of the few ideas we’ve enacted that I can claim to have come up with myself is a risk rotation system. The idea (as I originally presented it) was that we would each year have three risk levels: Safe months (where we would invest in a broadly based index fund); medium risk months (where we would invest in a well known individual company in good shape); and high risk months, where we would invest in something crazier.

In truth, mainly due to our lack of research skills we haven’t been that comfortable taking bigger risks and we’ll probably wait on that until we have learned more about judging a company’s quality (reading 10-q and 10-k reports/balance sheets).

So after we accepted this plan the first investment decision we had to make was what we would use as our broad based index fund. We ended up deciding on VTI, for a number of reasons, mostly related to the super broad base “The fund employs a passive management strategy designed to track the performance of the MSCI US Broad Market index, which consists of all the U.S. common stocks traded regularly on the NYSE, AMEX, or OTC markets”, the super low expense ratio of .07%, and the low turnover rate of 4% annually.

In addition to those concrete reasons I have a fault of pushing companies more for their historic value, which unfortunately doesn’t speak too well to their future performance. I’m a big fan of John Bogle, as a result I not only wanted to go with a Vanguard index fund, but I wanted to go with one that was about as diverse as could be.

To date the only problem with VTI was that the high per share price often meant we had to make slightly smaller investments in it leaving a little extra money sitting around. This was enough of an issue (given the already small size of our investments) that we discussed for a while the possibility of switching index funds, but when VTI split that ended that discussion.

Here are a few of links about VTI:

https://personal.vanguard.com/us/FundsSnapshot?FundId=0970&FundIntExt=INT
http://caps.fool.com/Ticker/VTI.aspx?source=ifltnvsnq0000004

What we’ll post.

We’re going to be having a number of different series of posts. To start things off we’re going to write a post about each of the positions we currently hold, including links to information about the companies, and if we remember some of the reasons we chose that company over others we were considering. When the initial bunch of companies are gone through that will become a regular post as we choose new companies.

 

After we catch up on those we’ll write posts about the atypical stock transactions we’ve already experienced (bankruptcy, bought for cash, bought for stock, stock split, and participating in an IPO). As more of those types of learning experiences happen I’ll probably write about them in the present tense.

 

Mixed in with those we’ll likely post some opinion about how things are going, both with the club, and the economy as a whole.

 

Also I’ll probably post numbers about how the club is performing at least weekly.

How we decide.

So to give you all an idea, here is how we decide what to invest in:

 

At any given meeting we choose a sector we’ll be investing in the month after next and through the month we each (most of us) do some research, and suggest a company or two for that sector. Then through the second month I follow the suggested companies (loosely) and remove any that have become clearly no longer a good idea. There are some restraints/pressures on the risk level but so far we mostly ignore those.

 

Anyway when we finally meet we usually have a list of 4 – 6 companies we are considering. We discuss each of them, and I bring to the meeting a list of statistics comparing them, along with a little bit about their narrative. After at least briefly discussing them all we start narrowing the field usually until we pick one company. Sometimes we split and invest half into each.

 

It’s important to our group dynamic that most if not all decisions are made by consensus. We have clearly decided (even in writing) that we will vote to decide what to do if consensus cannot be reached, but I’m not sure that that has ever come up. We have voted multiple times, but we did it more as a tool to gauge people’s thoughts than to make a decision.

Work in progress

One might think as this club approaches a year old that most of the work to keep it running would be complete. And that’s more or less true, but this week has been busy. In addition to starting on a new website (this) a new excel sheet to track our progress (which we will switch to for year two in September), we also are meeting to fill out forms en route to switching to a new brokerage firm.

On the upside we’re in the black again, which at least I find makes the work much easier.