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Wednesday, December 30, 2015

Charles's Angels

Charles Dow that is. Famously, he created the first ever index of 12 industrial companies in 1896.
Cotton, tobacco and leather where big businesses of the day. Energy and materials are just as important now, as at the dawn of 20th Century. GE is still here, thou hardly the same as Edison's GE - a merger of Edison Electric Light Co with bunch of others, financed by Drexel and JPMorgan ... ha-ha-ha...

120 years later, Dow Jones Industrial Average has 30 stocks, but only 5 of them (16%) are really industrial.
Machinery GE and MMM, aerospace/defense BA and UTX, and big CAT. That's it.
This is what DJIA has now:


 Definition of word 'industry':
    1. economic activity concerned with the processing of raw materials and manufacture of goods in factories.
Goldman Sachs (GS) don't make shit, and the only thing 'raw' about United Health (UNH) is my ass...
However some other stocks make a lot of sense as 'industrial': XOM is a producer of important raw material and DD is a huge chemical factory. JNJ does everything in consumer goods, drugs and medical devices, while AAPL makes popular trinkets everybody buys. Lest we forget an all-American auto industry (F), huge company that owns all the things worth having (BRK) and biggest food manufacturer on a face of (american) earth (GIS)... and VOILA! - we have...
iBergamot Industrial Average (IBIA), expressed as 12 stocks... just what Papa Dow ordered...

I don't know if IBIA will outperform any of popular averages, but it is not a point of this exercise. For the first time ever, I will be able to see a true price performance of industrial sector - in an index not polluted by unrelated issues (DIS is not a factory - its a doggone la-la land!), not manipulated by market cap size (AAPL is the biggest by a mile, but imnsho the least important one of all), not continuously changing composition in an interest of chasing latest fad. Having said that, I might change some companies in IBIA if I decide they no longer serve as best representatives of important industries. Its my index. Fuck off...

Other part of Dow Theory is a transportation average - originally mostly rails, now has 20 components including Delta airline and Avis car rental. I still give more credence to ol' Charles, who viewed transportation as a vital link in an economy, the means to move raw materials to factories and finished goods to consumers... not as Florida travel accommodations for fat people... Unfortunately good transport index is hard to make, because rails don't have such huge importance anymore, air doesn't move as much stuff as it could and most of biggest shippers are either private or don't trade in US.
Following is my guess of iBergamot Transportation Average (IBTA):

I would be remiss not to mention Utilities average, although not part of original Dow Theory, I see utility industry as solid money making enterprise, vitally important to economy, people's every day life and progress off all humanity broadly speaking. Popular index XLU offers a pretty good representation of stocks involved. Utility portfolio strategy outlined in FMSUP article (link) can be mistakenly classified as 'index', as it has some of the traits of modern structured investing solutions, but I rather see it as a mutual fund of sorts. High position concentration and periodic re-balancing (performance drivers) designed to create an upward equity slope, leading to out-performance of FMSUP vs. industry on average (I hope) and most other mut fund managers (betting on it).
I don't think that my own indexing approach will offer any additional insight, but here it is nevertheless -
4 electric, 3 diversified, 3 gas, 2 water - iBergamot Utilities Average (IBUA):

I will be setting up these as Motifs for easy tracking, starting on a first trading day of the new year.

Programming note: this method is labeled 'IBIA'

Monday, December 28, 2015


We are generally overconfident in our opinions and our impressions and judgments. - Daniel Kahneman

J P Morgan Bubbles. 1901
I have to admit, shortcuts don't work (post link).
Methinks, I got a pretty good beat on things around market. Even with minimal to non exposure to news and commentaries on my part lately, the remarkable ability of some stocks and industries to continuously penetrate collective psyche is simply unbelievable. Sometimes I am almost sure - it's by design. Everybody piles up into same issues all at ones (I'm talking big money) with surprisingly random results. Aren't these people actually suppose to know something? Like certain inside information (legal, of course... ;-). Didn't some of them just spent handful of years (and dollars) in business school, learning every fundamental thingamabob known to men, analyzing balance sheets and shit...?
And what?
Still like throwing darts at a Barron's stocks table.
By their very nature, heuristic shortcuts will produce biases, and that is true for both humans and artificial intelligence, but the heuristics of AI are not necessarily the human ones. - Daniel Kahneman
It is understood that fundamentals of a company can be made look like anything imaginable. Accounting can be stretched beyond any reason, but there are certain traits that are both hard to manipulate and signs of good business at the same time. My focus is on basic and broad characteristics, regardless of how big or small they appear, seeking only binary answer: YES (present) or NO (absent). Following is my hypothesis of what investable stock of prosperous company should look like:

1. Active, tradeable american stock, more than 5 years old. Price >$5; av volume >1M
2. Enterprise is profitable with sales, but not excessive valuations. P/E <50; P/S <10
3. Dividend is a further proof of positive cash flow and shareholder responsibility.
4. Price is above 200 day moving average.
5. Modest amount of debt is permitted.
6. Both earnings and sales exhibit growth over past 5 years.

Finviz scan (link) revealed only 36 such stocks on 12/24/2015 - call it Best List.
I suppose this is the best this market has to offer, but it is not possible to invest into that many with any reasonable amount of money, because this list will fluctuate and cause all kinds of portfolio mayhem.
Then I propose this DART Strategy Portfolio:

a. 10 random stocks will be selected from Best List. Equal position size.
b. At the end of the week the worst loser will be sold and replaced with random pick from new scan.
     b1. If there is no stock with loss from purchase price - sell biggest weekly loser.
     b2. If there are no weekly losers - sell biggest winner
     b3. If there is not a sufficient number of results in a scan - #5 and #6 above can be relaxed somewhat.
     b4. Average volume requirement may be reduced temporarily, to as low as 300K at times.
c. Sell and purchase will be placed on Monday open, or 1st trading day of the week.
d. Estimated commissions ~2.5% of first $35k invested, about same as effective dividends.

DART is an experiment designed to prove that by investing into sensible stocks of best companies, with rigorous risk management, absolute positive returns can be achieved regardless of personal opinion and market timing.

This is a test! 
No real money will be traded, but I will keep a virtual trading account with (near) real records. 

Programming note: this method is labeled 'DART'.

I find it hard to believe this could work, but then again, I used to believe that KREM is the way to go. Originally I thought that "all my efforts need to be confined to this list" (post link), but later I realized that KREM is kind of a "picture of average, active, media driven, collectivist investor horde" (post link). In fact equally weighted KREM index not just lost money this year, it did it continuously with no respite and managed to underperform every index I follow including my own strategies.

GURU method (post link) did no better, as can be seen from namesake etf performance. My analysis of holdings in GURU etf, and also some endowments and big-big money managers portfolios, revealed huge turnover, wide range of opinions and forecasts and amazingly high level of risky speculations with futures and options. What it didn't show was any kind of substantial profits, just a few percent on both sides of 0 at best, with some noticeable cases of near catastrophic losses.
These suppose to be the brightest minds... oh boy...

Large portion of Best List are tech stocks, mostly semiconductor makers and equipment

January 4, 2016 initial allocation for virtual account only!
November 09, 2016. New simulator at MarketWatch

Friday, December 18, 2015


Seeks capital appreciation with focus on absolute returns, irrespective of any benchmarks, but comparative to Utilities Sector of S&P500 (XLU).

Investing in utilities industry in USA, using common stocks, long only, no margin.
Investing in companies principally engaged in utility operations emphasizing power and gas, generally not including telephone and telecommunications utilities. No out-of-index positions allowed.

Within the utilities sector, we believe buying companies with rising share prices and above average dividends can make a boat-load of money over time.
There are about 100 American utility companies currently trading in USA. Half of them are active tradeable stocks, profitable and with dividends. 40 of them are 'electric' and 'diversified', with some discrepancy as how to classify some. For simplicity I will use Finviz's sector designation, but  generally following XLU index allocation.

Finviz Utilities screen (link)
Utilities Select Sector SPDR Fund (XLU) from State Street (link)

Utility Portfolio will consist of 6 stocks, selected on basis of dividend yield, market cap and share price performance. Our investment approach focuses on stocks with reasonable valuations and proven track record, as such we lean towards companies included in S&P500 index and generally avoid recent IPO's. In interest of diversification and with objective of consistently meaningful portfolio impact, we allocate equal standard position size to 3 electric, 1 multi, 1 gas, 1 water, with understanding that substitution is permitted at times.

The value of portfolio investments will vary from day to day... just because..., and money can be lost!
In order to mitigate an impact of chaotic price fluctuations we deploy risk containment measures designed to sell losers and let the winners run, with goal to be near-100% invested on any 30-day rolling period, unless a bear market strikes and all stocks go to shit.

Portfolio is allowed 12 re-balancing per year (200% turnover) or one switch per month on average, for about 1.2% in expenses of first $20,000. Every effort is made to minimize cost, but keeping in mind that quarterly dividends needs to be re-invested as soon as possible, which requires at least 4 round-trips per year.
For ease of tracking purposes, initial allocation will be made on open of first trading day of new year.
Activities will be reviewed on quarterly basis or as need arises.

Diversified Utilities
Gas and Water

 A man always has two reasons for doing anything: a good reason and the real reason. - J.P.Morgan
In a previous post (link) I outlined my deep dissatisfaction with performance and management of one of my investments - Fidelity Select Utilities Fund FSUTX (link).
Adorable Mr. Simmons is a really nice guy, I would love to have a beer or two with him while slinging war-stories about dumb investors and gullible speculators ... and a wretched 15% loss in my investment (little less including dividends), while index is down only single digits. I tested my own utility portfolio, based on strategy outlined above. Out of six different runs there wasn't a single case of double-digit loss, with last iteration up 11% -  all during a period when XLU was flat to down.
I am looking forward to putting up some of my own money in a sensible, focused way. Surely it will give me a great pleasure to not only make some profit next year (*what a novel idea), but also at the same time Fuck Mr Simmons's Utilities Portfolio and half a million dollars he dumped on his useless college education...

This is end-of-2015 allocation.
January 4, 2016. Starting allocation: