Recent Sell – The Big Reset Edition

I have broken the one rule that dividend growth investors never dream about doing and Im sure this will not be a popular post with the community. I sold part of my portfolio and took some of my money off the market! I have been antsy over the past few months and decided that for the sake of my sanity, I needed to move part of my portfolio to cash. This was the easier part of the decision. Which stocks to sell? That was much harder to decide. This post details my recent sales in the portfolio and provides my reasoning.

As most investors are aware, buying is the easy part. Its the sale: when to take the profits? or when to cut your losses and re-evaluate your investment thesis? — that is the hard part. Dividend growth investing, while I still really like the overall concept, can cloud this judgement a bit. Being “paid to wait” (dividend payments on a regular basis) is a double edged sword. There are countless articles out there which detail why this is the best thing since sliced bread, so I will not rehash the idea. But the flip side of this argument is that investors become too complacent risking a lot of their capital for very little reward.

Reason # 1 – Insanity in the Market

Image Source: Hedgeye

Image Source: Hedgeye

This market is crazy. There is no other way to put it. There are plenty more high-profile institutional investors, with far more resources than retail investors, who have been sounding the alarms. But like I have learned during the previous cycle (in the lead up to financial crisis of 2008/2009), I dont buy their arguments simply because they say so. I decided to listen and read through their reasoning (for e.g., see Jeff Gunlach’s latest presentation, and Stan Druckenmiller’s latest presentation) and looked at the data. The data doesn’t lie. And as far as my limited understanding goes, I can see why this market cannot continue its run higher, without some bloodletting.

We have had this current bull market raging for the past 8 years. A bull market does not simply die because its old, but it does look very tired. The drugs (QE) are wearing off. Everyone (the Fed, the companies, the consumers) are deep in debt over their eyeballs, having borrowed from the future and overleveraged to the limits (and beyond). If you’ve been paying attention to my monthly Outlook series, you may have noticed that I have been repeating myself over and over since the start of the year that everything stinks and nothing looks like a worthwhile investment (except precious metals). There have been signs from all over the bond, commodity, transportation, manufacturing markets to name a few, that all is not well with the world. We have been in a earnings slump — what the media likes to call, an earnings recession. This is one of the most obvious signs that companies are not doing as well as the market is pricing their stocks.

One of the biggest contributing factors for this bull market have been the share repurchase programs, fueled by cheap access to money via the debt markets. I have made it clear on my blog in the past (again, not a popular opinion with investors these days) that I hate the extent that it has grown to, even though there is a case to be made for some controlled buybacks for some companies. Research has shown that companies are just like individuals/retail investors (is it really that surprising?) and suffer from the same fallacies — they buy when the stock is expensive and there is euphoria in the market and terminate the buybacks when the market crashes and hard times are come around. The buyback continues its crazed euphoria as companies over-leverage and are approaching a point where borrowing more could result in rating downgrades; and thanks to an ‘earnings recession’, the company coffers have been running low for a while.

The following chart from FactSet shows that buyback still continues to be way above average as of Q1 2016. Notice that energy sector buybacks have collapsed well below the sector aggregate illustrating my point that companies, just like individuals buy when market is up and terminate buybacks when the stock price is cheap. So, one has to ask: do you buy stock in a company when the company is buying its own stock (instead of investing for its future) and its insiders are selling?

factset-quarterly-img1

The tide is also changing from largest institutional and sovereign funds. The collapsed oil market has forced the hands of sovereign funds from Norway to Saudi Arabia to China to start liquidating their assets in stocks.  The move has been slow because there arent much alternatives for good investment out there, but once something new is identified, that selloff may accelerate. These are funds that control a big portion of the respective nation’s wealth and increased activity will have drastic effects on the overall market.

These are just a couple of examples that I am highlighting — there are plenty such movements that make me realize that this market is insane. At the end of this cycle, one of these may not be the reason for the collapse. It could be some other black swan event. But I do know that I want more cash ready to invest for the long term than I had before I started my selloff.

Reason # 2 – Dividend Investing

As dividend (growth) investing becomes more popular — thanks to the coverage from mainstream media, I have noticed a big change in attitude from the overall population. The bond market doesnt yield much, and so everyone turned towards the dividend paying stocks reaching for yield. This has led to stratospheric levels of valuations. Stocks trading at 20-30 times forward earnings is not unheard of. We can try and justify all we want – that its a safe investment, its a solid company, its a recession-proof sector, but that kind of valuation just doesnt make any sense in my opinion.  Look at Procter & Gamble (PG) as an example. It currently trades at P/E of 28 and Forward P/E of 21! That is absurd and I wouldnt want to touch it with a 10-ft pole.

More importantly, I see a lax’d approach amongst dividend growth investors. Most investors I come across are on a buying binge holding 100% in equities, because why not? “What could possibly go wrong”, I hear. Market and stock fundamentals be damned. This has caused me to re-evaluate and look at investments in a new light and get out of some of my positions that I feel do not make sense.

Its the same with the media. Dividend investing is shoved down everyone’s throat making it seem like its easy money. Remember that everyone appears to be a genius in a bull market. Once things go mainstream, like a hipster, you gotta move onto new pastures 😉

Reason # 3 – Simplicity

Over the course of this cycle, I have fallen into the trap of buying companies left, right and center as long as they looked attractive. I kept buying more companies with the thought that I was able to diversify my portfolio. Before this selloff, I had grown my number of holdings to 32 companies (plus 6 funds — which already give me good diversification). But the high number of holdings come at an expense — I have to stay on top of things and monitor the companies to make sure there arent some major issues creeping up. This takes too much of my time. Research has shown that you do not need more than 12 companies to achieve what diversification tries to achieve — i.e., protect from downside movement due to Unique Risk. I have written about this in the past here.

I do not see the point of holding stocks in 50 or 100 different companies. The portfolio loses any sort of focus holding that much and investors are better off with index funds instead. If my portfolio reaches – say 50 different companies, each investment would make such small portion of the pie, that the amount of gains — whether dividends or capital gains, would be meaningless. Yes, I am well aware that if a company fails, you only lose a smaller portion too.

While holding some index funds, which give me good diversification across the sectors, I want to now focus on a smaller group of companies that I am willing to take a bet on. This means that I make my selection process more stricter. Each company has to pass higher hurdles in order to qualify for my investment dollars. This I think is better use of my time and focus rather than perusing IR pages of 50 different companies and reading bull & bear cases from thousands on analysts on why an investment is good or bad and evaluating the points.

Reason # 4 – Sleep Well At Night

With all things considered above, over the past few weeks I’ve spent a lot of nights staying up and worrying about our portfolios and trying to decide what is best for our nest egg. While not up every night, whenever I did think about it, I was worried enough to disrupt my sleep and decided that I need to move a part of my portfolio to cash. After I finally pulled the trigger over the course of last few weeks, I am happy to say that I sleep well at night now 🙂

Recent Sell

So, before I get into the detail of which companies to sell, I was faced with another challenge. Do I sell all of my holdings? How about half? This was really a hard decision and after some considerations, I settled on a number: 1/3.

Amongst all the classes/sectors of the economy, during this low interest rate environment – I have faith only one type of holding: hard assets. This includes precious metals such as gold/silver (hence the recent purchases) and real estate. Note that my exposure to these is still through the equity markets — I own gold and silver mining and streaming companies and REIT stocks (which are dividend growers themselves).

In addition, I would still like to hold some dividend paying stocks generating income and staying invested in the market. I still like my money working for me.

So, with that in mind, I decided that dividing my portfolio into three would be a good compromise. So, I am targeting 1/3 in cash, 1/3 in hard assets and 1/3 in dividend paying/growing stocks. Note that this only for the time-being, until I feel its time to start moving back into the market.

The Sales

Following are the sales I made in the portfolio and I provide some reasoning behind each sale. I also present my total return on each investment, which includes dividends accumulated during the holding period. I considered various different metrics for each sale. Current valuation, expected revenue and earnings growth, secular trends, credit ratings etc. The decision for each sale was a result of combination of each those metrics.

Apple Inc (AAPL)

Yes, Apple. There is a lot of like about the company and I like the story on a long term basis. The company continues to invest in new technologies — and is currently investing more than ever their next set of products (Apple Car?). But for now, I have decided to exit this position. Apple is a cash flow machine but it faces the Curse of the Dow. Ever since it got included into the DJIA, the company has stagnated as its stock price is destined by the movements over the overall index — large institutions buy and sell an insane amount of the DJIA components due to re-balancing measures and simply money moving in and out of index funds. The company has become a value trap of sorts over the course of last year or two. Apple is also one of the biggest share repurchasers in the market and can raise money from debt markets at a great rate. But this financial engineering is also part of the problem. Apple has to resort to such measures because most of its cash is parked overseas and the broken US tax system forces the company’s hand to take these measures. This is one company I will definitely reconsider buying in the next cycle.

Total Return: -11.6%

Amgen Inc (AMGN)

Amgen is one of the largest biotech companies in the world. Its largest money-maker, Enbrel, came off its patent in 2012 and since then, the market has been flooded with biosimilars. Although the US FDA granted Amgen a second patent which gives it exclusivity for another 16 years, it hasnt stopped the biosimilars. The company has been trying hard to add roadblocks to competition on moving into its turf, but its pretty obvious that sooner or later they are going to lose the war, even if they win a few battles. All is not lost, since Amgen has some great lineup for other drugs with its focus on oncology, nephrology and cardiovascular. Amgen is also launching its own biosimilars. More recently there has been talk of Medicare spending slowdown that could see an effect on the sales of these drugs. During my holding period, the stock has traded sideways over the last couple of years and I decided to take a step back and reconsider this investment.

Total Return: 2.8%

Agrium Inc (AGU)

The commodities are in a slump. While most other fertilizer companies have collapsed and had to resort to dividend cuts, Agrium has done extremely well. This is mainly due to the fact that they have a large retail segment, which has avoided the storms the wholesale businesses face. Right after I purchased it a couple of years ago, it was disclosed that ValueAct, a hedge fund, had taken a large stake in the company, which caused the stock price to take off. Although it had cooled down a bit since hitting its peak, I was still able to sell at a decent gain. I had to ask myself a question whether I strongly believe in this company, whether it had a huge moat, and whether I want to focus my attention so closely to the fertilizer industry. The answer was no. Considering all those options, I decided that I will take my profit and exit this position.

Total Return: 30.6%

AT&T (T)

Telecom companies are turning into utilities these days and the high yield is very attractive for investors looking for yield. The reason to sell AT&T was mainly due to the debt load and management issues. Lately there has been no growth in the company even though its had decent cash flow. But the company’s move to acquire DirecTV was heralded by the market as a great move even though the company added an extra 50% to its debt load. In addition, after being unshackled from the DJIA when Apple replaced it, the stock has taken off. The current debt load looks ok, and is still better than its main rival Verizon Communications (VZ). Current debt service ratios suggest that the company can easily service its debt. The concern I have is that management seems to be addicted and not following on its word. During the acquisition of DirecTV, the CEO stated that the debt load has gotten high and will focus on reducing it going forward. However, like a drug addict, they are high on the debt-funded buying sprees putting on more debt on the balance sheet and considering more purchases – the latest bid for Yahoo’s Internet Business, which can add another $4B-$8B in debt. The debt load has already risen since the statements from the CEO last year. If a management cannot control its urges to spend and stay true to its word, I have no patience for its stock in my portfolio.

Total Return: 26.7%

Cineplex Inc (CGX.TO)

Movie-goers month-after-month continued lining my pocket with money with this stock. Over the course of the years, I have enjoyed the monthly dividends from this company and also some decent capital appreciation. A small-ish company at $3B market cap, the company has high valuation with P/E and Forward P/E of 22. Overall, the company has been a decent cash flow entity, but lately has struggled growing its revenue (although earnings have increased nicely). Cineplex’s biggest money maker has been the “concession” stands (the food and beverage business) and the new media advertising business is doing pretty well too. Overall, I am tepid about this investment and decided to take my profit.

Total Return: 86.2%

General Electric (GE)

The behemoth in the industrial space. The company is shedding a lot of financial segments and buying more industrial players in Europe. Overall, a great direction for the company to move into. But with 10 billion outstanding shares, it takes a lot to move the needle — although the company is buying back shares and is on target to reduce the number of shares to 8 billion. Current payout ratio is extremely high (at 143%) and dividends have been stagnant — may raise this year after a failure to raise in 2015. GE usually tends to perform really well late in the economic cycle and that is what its been doing. Time to take some profits, although it might continue its march higher a bit more from here.

Total Return: 23.1%

Main Street Capital (MAIN)

One of the best Business Development Companies (BDC). This company is run better than other BDCs, and the deals setup are slightly safer making it an attractive investment. With Main Street, I was directly exposed to small businesses and any slowdown/recession in the US would have an adverse effect on repayment of loans. In addition, the investments are focused in southern US in and around Texas — which has faced the wrath of the oil industry’s collapse and other industries have/can continue to see a knock-on effect. With the stock yielding 8.2% (7% regular dividends + semiannual special dividends), my original investment in this company was a reach for yield. I have been through one cycle where high dividend stocks crashed and burned (not to say, the exact same will happen with MAIN), but I decided that its a risk I am not willing to take with my money anymore.

Total Return: 18.4%

Power Corp of Canada (POW.TO)

Another great company that has a lot of history. But the stock has stagnated due to the fact that insurance industries can barely make any money in this low interest rate environment. The company has already started raising dividends after a freeze for a few years, but an argument can be made that the move was premature. The fundamentals are great with this company overall and I will reconsider to invest in the future, but at the moment, this company made the cut for elimination.

Total Return: -6.3%

Thomson Reuters (TRI)

Thomson Reuters has faced increasing competition over the years as more established as well as upstarts have been chipping away at its core business. The company has been moving pretty slowly to turn things around and forming new products, services and deals. Overall, the revenue has stagnated, earnings have suffered, dividends have increased very slowly and payout ratio has been all over the place. Its a segment that I dont really have the desire to focus on and decided to take my profits here.

Total Return: 85.5%

Wells Fargo & Co (WFC)

This has been a hard decision to take. Wells Fargo has been a great investment and has a huge exposure to the US housing market. While I dont think we will see a 2008-style crash again, there are some sign of some more housing and consumer loan credit issues. Wells Fargo has also been relaxing a lot of its rules lately, such as reducing the downpayment needed, and also recently lowered the credit score requirements in order to fuel its sales. These are the kind of moves that I am not happy to see in my investment holding. A similar argument can be made with my two other bank holdings – Bank of Nova Scotia (BNS) and Toronto-Dominion Bank (TD) — which are exposed to Canadian housing market, where chances of a crash are higher. I am considering selling those as well, but for the time being decided to hold onto the shares.

Total Return: 30.2%

Conclusion

When to sell a stock is almost always harder to decide than buying. Its been an interesting few weeks/months and a lot of things have been weighing on my mind lately. From my vantage point, this market seems insane and after a lot of considerations, I decided that I want to simplify my life and reduce the number of holdings. The approach I have taken is to move my portfolio for the short-term into thirds: 1/3 in cash, 1/3 in hard assets (gold/silver and real estate) and 1/3 in other dividend growth stocks. After pulling the trigger to make these sales over the past few weeks, I now feel a lot more comfortable with my holdings and am ready for the market to correct. Of course these sales will change my overall forward dividend income and will probably lead me to fail my annual goal, but I can now sleep better because I know my portfolio is ready to move when this market gets some sanity knocked into its head.

After the sales mentioned, my overall portfolio diversification looks as follows. I still havent hit the 1/3 in Gold + Silver + REITs, but will be hoping to make some purchases in the coming days on that front to get to the balance I desire.

image (1)

I know this move will not be a popular opinion with most of the community and I look forward to hear your arguments and counterpoints. Bring the onslaught on 🙂

 

54 thoughts on “Recent Sell – The Big Reset Edition

  1. I applaud you buddy. You sold to the point of comfort and raised some dry powder. I saw a great quote from Jim Grant this morning….that “today is a great day for humility”. I think that hits the nail on the head for me. The markets were too complacent and they still think the central banks will bail everything out. We shall see, but I’m glad you raised some cash before the selloff. Might be a one day selloff, or the start of something big. Time will tell 🙂

    Here’s hoping that the British exit will prick the global asset bubbles before they get more ridiculous. Looks like the Fed is more likely to cut than raise in the coming 12 months. Ha, academics…….
    -Bryan

    • Honestly, I wasnt trying to time this market. But the more I read, the more it didnt sit well with me on what was going on in the markets. I think the image from Hedgeye sums it up nicely 🙂
      Thanks for the words of encouragement. So much for raising interest rates eh? There will be a lot of moves from the central banks to calm the markets and we might see some action from IMF as well. Im halfway thru Jim Rickards’ ‘New Case for Gold’ book and these are the kind of things that he is banging on about. Fiat currencies go up and down. Gold is forever. No one couldve imagined GBP taking a massive pounding (pun intended) like this.

      Agreed. This could be the start of something big. We’ll have to wait and see how things progress. For all we know, UK may not even act on this referendum to leave the EU.
      R2R

  2. Very Interesting read. Thanks for sharing your thoughts…. Here are mine:

    I have been reading the same thing for 8 years about this Bull market cant continue, its extended its welcome, etc… and the facts certainly support it. There will be another crash, that much is certain… but with the way the market acts, I wouldnt be surprised if its another 5-10 years down the road.

    I recently posted on my blog (albeit not so extreme) about a similar feeling. Looking at dividends alone, it would take me years and years of dividend payments to reach the current gain level of a few of my stocks. So why shouldnt I sell my big gainers now and sit on cash until they come back down to reasonable levels? I love passive income, and generating a check each week for doing little is great, but being an engineer… sometimes I have to look at things logically and not always stick to the plan.

    Thanks for keeping all of us on our toes and things in perspective!

    • Just read through your post, Adam. It is a valid question. When do you say that it doesnt make sense to simply just wait to collect dividends when capital gains are presented on a platter? 5 yrs worth? 10 yrs worth? 20 yrs worth?! We wont even know if a company will exist 5, 10, or 20 years later (companies are dying and merging faster than ever, historically speaking) and banking on those future dividends may not be the most prudent thing to do. Sometimes you have to take the profit and move on.

      Thanks for sharing your viewpoint.

      Best wishes
      R2R

  3. JCulley says:

    This is going to sound harsh, just know I don’t mean it as an attack!

    I think you made a monumental mistake. I think you’ve allowed outside influences to scare you out of the market, these are the same people who have been making the same claims since 2010. The whole purpose of Dividend Growth Investing was to create the growing income stream, insulate you from the day to day, month to month and even year to year price swings and keep you focused on the end goal that is 20, 30 years down the line.

    Gold and silver make garbage long term investments. So now you are going in the situation where you have to time your entry and exit. I have a friend who bailed on his stocks to invest in gold back in 2009. Whenever we talk about investing, he swears the market has to crash and gold has to come back. He has lost so much money and missed so many gains, he will never recover even if he gets the crash he keeps saying is coming.

    Morgan Housel wrote an article about how pessimism looks smart and optimism looks stupid, and that gets people to believe the gloom and doom (Marc Faber hasn’t been right, ever. He missed 07/08 until it was already happening!). It sure reads like you’ve allowed the pessimism side to scare you out of the method of investing that the studies show works (buy and hold) and into a method of market timing, and even worse commodity cycle timing, that has been shown over and over to fail.

    The individual investor is bombarded with calls to do something. To let your inner trader show, to do currency hedging while on a date, to buy and sell and buy and sell, to channel trade, buy subscriptions to buy, sell or hold. Over and over, the right answer for what to do is to do nothing.

    Good luck with the future, I think you are desperately going to need it.

    • Thanks for stopping and sharing your thoughts, JCulley. I always welcome positive constructive criticism…its how we grow as better investors 🙂

      I understand the point of dividend growth investing is to simply invest and forget, but for the reasons I mentioned in the post I simply could not justify leaving my family’s nest egg vulnerable to the whims of the stock market. I have a responsibility to ensure the success of my family’s future and capital preservation is one of the main points for me at this moment. With a bull market this long in the tooth, I couldnt justify staying fully invested when I had the opportunity to take some money off the table and book those profits.
      As you may have noticed, i am not completely abandoning DGI — I still have half my portfolio (the 1/3 in DGI I mentioned + the REITs I own are also DGI stocks), so DGI still forms a big part of my overall plan to invest. Whether I made a monumental mistake with this move, I guess time will tell if I did so. If I did, I can always come back to this post and re-read it and try to learn though my mistakes.

      As far your comment goes about gold and silver – i have to disagree with your statement that they are “garbage investments”. Gold and silver have stood the test of time and no matter how much modern portfolio/monetary theory/system tells us otherwise – it will still be a bedrock of what people trust as a medium of money. Some western countries has shunned gold when it comes to gold standards in their monetary, but more than half the world – still strongly believes in it. And that says something. Gold is money. It is not a proxy. It is not a empty promise. It is money itself. No matter what the fiat currencies say.
      If you look at how gold (and silver for that matter) has performed over the years, and really look at the returns that it generates, it has held up really well and outperformed a lot of other asset classes. Yes, the last 4 years have been bad, but look further back in history and you will notice the returns are fantastic. This, I am referring to, the metal/bullion itself. If you are referring to mining companies as vehicle for investing in metals – then yes, there are cases and arguments can be made that htey can be terrible investments. The fact that some miss with that is that gold mining stocks are not necessarily suited as a buy-and-hold-and-forget-forever philosophy. If you follow the market cycle, and can get in and get out at relative decent times – you can make a killing in those investments.

      cheers
      R2R

  4. Good timing…maybe.

    I went to 60% cash in May. Technically that was to get out of a bunch of crummy mutual funds and move a big chunk from an expensive adviser/broker to a self directed account. But a lot of the thoughts you outlined went through my head, and it helped spur me to action. I thought, “well there’s worse things than being heavy cash when everything “feels” frothy like this”

    And you know what? It’s nice to have cash on days like this…

    • Good time to hold cash 🙂
      I dont think we have seen the worst. This might be the start of something big that some are calling the tip of the iceberg. Whos knows..we might have to wait months before we see this market topple. For now, i will sit on the sidelines watching the show.

      R2R

  5. I converted most of my old mutual funds to cash while I was on vacation. My intention was to cash-up for the upcoming dip(s) when I get back to the US, plus the mutual fund fees were killing me. I am not sure on how the market will behave due to the Brexit event, but having some ammo definitely helps. Good luck to you!
    D4s

  6. Interesting post, R2R. I hadn’t considered the fact that saving time and mental space is another argument in favor for index funds. I have some individual stocks, but I don’t really want to be bothered with taking the time to watch companies so closely either.

    • Thats why investing via index funds is recommend for most investors 🙂 It saves you the trouble of having to focus on one investment and company over and over and frees up your time to do what you want.

      Thanks for stopping by
      R2R

  7. Nice work and timing R2R. I planned on selling a bunch of stocks yesterday before market close, just in case the UK vote went the wrong way. Sadly, I was busy at work and ran out of time. Because of this, I’ll likely hold.

    • Too bad you couldnt get out in time before the selloff. Theres still plenty of time to take your profits…the market is much closer to the top than the bottom. The UK vote caught everyone by surprise.

      R2R

      • I agree. There will probably be a bunch of ups and down the next few weeks. I’ll likely sell some share and hold cash. It’s not that I don;t like the stocks I own, but if I can sell them for profit, then either buy them back a few weeks later at a much lower price or make money selling puts, it’s worth it to me.

        • Yeah I agree….if your costs basis is high and close to where the current stock price is, probably not a bad idea to sell out and wait for the market to correct to re-initiate.

          Best wishes
          R2R

  8. I’m always surprised to read “sell” posts among our DGI community because they are so rare. In general, we tend to hold through thick and thin especially if our portfolios contain solid dividend payers that can continue to pay and even raise their dividends during tough times. I don’t judge anyone for buying or selling any stock, fund, etc. This is personal finance which I always say is “personal.” You must buy and hold and sell what you feel comfortable with. Investing is all about an exercise in personal risk tolerance your reason #4 is really what it’s all about. Comfort. If your portfolio keeps you up something needs to change. While I don’t plan to sell a single share of any of my holdings at this time I can understand why you wanted to lighten up a bit. Thanks for sharing.

    • Mike A says:

      @DivHut – “…especially if our portfolios contain solid dividend payers that can continue to pay and even raise their dividends during tough times”…

      With the exception of T & TRI, these were not companies that paid and raised dividends during tough times. Selling T was a mistake, TRI, I don’t follow— but has 23 years of increases so likely a mistake.

      The rest looks like capitalizing on a run up of risky stocks. MAIN is a BDC that will cut its dividend in the next recession, WFC did cut in the last, GE did cut in the last, AAPL not even on the CCC list and some of these I’ve never even heard of or not on the CCC that I could find.

      This looks like taking out the trash to me and getting a good return on some subpar companies during a nice bull market. Nothing wrong with that.

      • Nothing wrong with that indeed. I’m not against selling, it’s just that these sells tend to occur during these negative times in the headlines. Can’t help but wonder if people are really in it for the long term through thick and thin or want to be more of a trader. As I said, I’m not against selling. I’m sure one day I’ll sell some of my holdings but it won’t be because of a down day rather my shift in the belief of the future of the company. I held my GE and WFC through their cuts during the great recession and added to my positions during those dark days. In general, “portfolios that contain solid dividend payers” do well over the long run and names like MAIN or other MLPs or other high risk names do not even make my portfolio and really have no place in a long term dividend growth portfolio (maybe just a tiny, tiny fraction). As I commented, reason #4 is really what it’s all about. You need to feel comfortable and be able to sleep well at night with all your holdings. Owning a penny stock or a JNJ doesn’t matter as long as you can sleep.

        • Mike A says:

          @ DivHut, I am essentially agreeing with you. My only quibble with your comment was what I quoted. Most of these are not long term increasers and more risky than the typical buy and hold long.

          Most don’t make my portfolio either. Some take chances in a long bull market. R2R got lucky with a few of these that is all. Smart to sell, most are junk.

          Excepting T and TRI (potentially) Weill research that one as not on my watch list.

          • Mike,
            The moves with T and TRi and my justification to exit those positions have been detailed in the post.

            To reiterate, in case of T – I dont like how the management is piling on the debt on a regular basis and cannot follow its own word that it will start cutting it back. Unless I can trust the management to follow up its words with actions, I cannot trust them with a single dollar of my investment. Its a lesson Ive learned in the previous cycle and even lately with KMI — they piled on the debt and flew high promising the world to investors. I was too complacent then. I do not intend to be complacent this time. Having said that, do I think T will cut its dividend anytime soon? No. They can easily cover the dividend based on their current cash flow.
            As for TRI — the company has had its core business challenged by many newcomers and some older players year after year. I dont see as wide a moat as it did a few years ago.

            DivHut,
            One comment that I have to object to and do not agree with is the “hold through thick and thin”. This is investing and its business. I do not intend to form an emotional bond with a company and stand behind it thru thick and thin. If a company is not going to deliver on the expectations, I do not need to invest a single dollar and back a company just because I happen to like it. Maybe you feel differently about it, but I think that can be dangerous for investors to develop emotional attachments.

            cheers
            R2R

    • Thanks for the comment, DivHut.
      You hit the nail on the head there — its ‘personal finance’. One size does not fit all. As much as we like to say that DGI is great, it depends on each person’s risk appetite. Fully invested in DGI was fine for me until now, but over the past few months, I dont see the risk-reward profile lined up to my comfort level as it did a few years ago. It is for this reason I have decided to exit some of my positions.

      R2R

      • What I mean about “thick and thin” is to simply not give up on a company that has a business that has not changed and is going through a near term slump. A few years back when JNJ was in the 60s it faced many near term issues with its product lines but the business itself has not changed. It was a time when every headline poo-pooed the stock but it was just a temp. set back. Similarly more recently we saw MCD hit the 80s when PNRA, and CMG were all the rage and MCD just didn’t “get it.” The fundamentals of selling food quickly was still the unchanged. It’s still the same business but MCD adapted and made changes to better reflect the consumer of today. Many poo-pooed MCD big time about a year and a half ago. That’s all I mean about sticking with it through thick and thin. Like Kodak of yesteryear the fundamental business did change big time. To get out of Kodak before the digital tidal wave hit was smart.

        • Gotcha. If you firmly believe in a company’s future and the market is mispricing it for whatever reason over a short term, then by all means I dont mind sticking by and being a shareholder.

          cheers
          R2R

  9. Interesting to see the moves that you’re making with your portfolio. As a move towards simplification I can’t blame you for doing this because I’ve also let some companies into my portfolio that probably shouldn’t be there or at least aren’t as safe as some of the others.

    • As we all start paying higher multiples in trying to find that company which has a good yield and good div growth, I am pretty confident in saying that we have let our guard down and let the quality slip. I know I have and have noticed similar moves in other portfolios out there. With this simplification, I am hoping to focus on a smaller group of companies and really focus on quality. Was it Buffett who said to invest like you have 6 punch cards for your investing…and bet big on them.

      R2R

  10. Wow, congrats on those big return. The number looks great except for Apple. I wouldn’t mind holding on to a chunk of cash now and jump back in when the yield is higher.

  11. R2R
    If selling your positions lets you sleep at night then you made the right decision for you. Historically I have made dumb financial moves when I was stressed so you not having that stress will let you sit back with a cool head o develop a new plan.

    For myself I plan on staying invested but I do agree with the overvalued aspect. I had a 401K rollover at the end of January and thought I’d have 100% invested by now but only have 50% invested as I am now struggling with valuations.

    Thanks for sharing

    • Thanks for the kind words, Ken.
      I’d rather sell now when the market is stable than in a hurry when its collapsing. Ive been thinking about this move for a long time now and finally made the decision a couple of weeks and started executing.
      Its good to have some cash ready for better valuations.

      Best
      R2R

  12. Sabeel, great decision!

    I feel your pain and share your thoughts.

    I think your move will give you great flexibility to get back into stock once they are attractive again. At the moment, they don’t look so shiny.

    For the sake of diversification, I’m analyzing some Russian ETFs and my founding are already super exciting. Not only the Ruble is super cheap, but their top corporate average a P/E 7.6%, and this after their main sectors are been bitten up for the last three years; metal and oil.

    I will soon release a post, you might find it interesting.

    However, your investments in gold and silver are already benefiting from Brexit. Well done!

    • Thanks Rudy.
      I can now sit back on the sidelines and watch the fireworks without worrying about how my familys nest egg is going to survive the next crisis. And there is a crisis brewing, no matter what others say. I think a lot of investors are getting too complacent these days.

      Interesting to know that….Russia is not a market I follow closely, but I remember hearing a bit about it when the currency collapsed a couple of years ago. Interesting to know that the stocks are cheap right now. I guess they havent escaped the oil market mayhem. But they seemed to have a really nice deal setup with China last year or the year before.

      Thanks for stopping by and sharing
      cheers
      R2R

  13. Mike A. says:

    @R2R

    “The moves with T and TRI and my justification to exit those positions have been detailed in the post”

    I know, regardless– those are your two mistakes is what I am trying to get at. That is my opinion–To each his/her own. All the rest, I agree, they needed to be sold.

  14. Have to agree with DivHut that #4 is all the reason you need #2 and #3 aren’t too bad either. And you should be commended on good timing. As a T retiree, I also concur with that assessment. I do have a couple of issues though:

    1) A basic DGI tenant is to minimize taxes and fees. Unless in tax advantaged accounts, your gains have been reduced (although your potential losses are minimized).
    2) Unless you’ve reinvested, with Gold at setting highs, the opportunity to buy low and book gains is now minimized – at least for this cycle.

    But good luck to you!

    • Thanks for sharing your thoughts, Charlie.

      1) I should have clarified in the post…but here it goes. All my holdings are in tax sheltered accounts, so the sales have no tax implications whatsoever.

      2) Ive held gold for a long time, albeit a very small portion. The initial jump from Friday may subside, but I dont think we have seen a high in gold at all. I expect gold’s bull run to continue for a long time as the bull market is just getting started. Of course, there is a possibility that this is a false start and we are just seeing a temporal increase in gold prices and the slump might continue another year or two.

      Best
      R2R

  15. Michael says:

    Personally, I do not think that equity markets will tank significantly over the next year. Maybe briefly 10-15% (20?), but I doubt any more than that. Volatility may stay high, though. Here is why:
    1. It seems everyone is expecting the Dow / S&P to go down. They are ‘all’ telling us that valuations are crazy high, and that the crash is near. Apart from the usual suspects (e.g. Faber) now also Soros, Duckenmiller, Greenspan etc. joined the crowd. This should not be ignored. BUT: The market very rarely does what everyone else expects and openly tells us on all media channels.
    2. Fund managers are already on the sidelines and have huge cash positions. In fact the cash positions are now highest for many years. And even though they obviously liquidated substantial positions, the indices are still up there. And now they are all waiting to get back in after the anticipated drop. Therefore any drop / shock (should it occur) will not be particularly deep. They’ll all rush in again very quickly. Brexit is a good example imo. Very unexpected, would have had the potential for a black swan. But there was too much cash waiting on the sidelines fishing for bargains. (Only the banks were left in the drain. No one loves them after Lehman). The upside, however, may be very limited as well.

    3. No alternatives. In Germany (where i live), the bund has just hit -0.5% on a 10year note. Who buys this stuff? Would you buy a “dividend” stock, where you would have to PAY a quarterly “dividend” to the company? No? Well, hello to the bond world. Fundamentally, nothing speaks for an asset like this. The only reason to own such a bond is a bet on the future (that interest rates will continue to go down – even though they already are at zero!) and hoping to sell it to a greater fool in a year or two. Compared to bonds, stocks really are not that expensive, the Dax is standing at a P/E of 12.something. Its the bonds that are the bubble.

    This is the result of the loose monetary policy and various QEs over the last few years. Should the velocity of money ever increase we will get significant inflation. And yet, today, the deflationary risks are very significant because of over-indebtedness (and the efforts to pay it down). The prospect of a mostly stagnant economy that can not decide which side of the ridge to fall down and the low/negative interst rates really make precious metals an attractive investment today. Or farmland / infrastructure. But stocks (especially stable, wide-moat) will not fare particularly bad either, i think.

    All the best,
    Michael

    • Hi Michael,
      Some great points made here….and for the most part, I think you are on the right track and strong arguments can be made from your standpoint.

      A few points on what you have mentioned.
      Re #1 — Yes, Faber, Soros, Druckenmiller and Greenspan have started sounding the alarm. But that is only a handful of superinvestors. Remember that for the most part, investors remain bullish on the overall economy and the naysayers get a bit more media attention as they take a contrarian view. It is the contrarian view that makes a killing in most markets — when things finally turnaround (someone like Paulson during the previous crisis). Mind you, there are always some perma-bears that keep sounding the alarm even when things are going great (someone like Rubin during the previous crisis)..and sooner or later they are right as the cycle goes through its ups and down. The fact remains that no one really knows whats going to happen in this complex economy. I for one decided to take a contrarian view on part of my portfolio and go to cash instead. Perhaps this bull market will continue its run…there is ample evidence of market manipulation and this will continue working. Until it doesnt.
      Which brings me to the point #3 you made. The same argument as the bond market goes for the stock market too….you are simply waiting to hand off the stock to a greater fool…until theres none left. The cheap money has skewed this market and nothing is normal these days. Folks are gambling in the stock market as nothing yields better opportunities. Its a house of cards — and when it collapses, everyone running to the exit doors will be left with worthless papers in their hands. Which is why I am betting on hard assets such as gold, silver and real estate. The whole monetary system is designed around inflation — the Fed and other central bankers will do anything to get inflation and in turn will destroy lives of countless citizens around the world with their policies. Their models are broken but fixing a debt problem with more debt is the only way they know how to deal with things — thanks to generations of brainwashing about monetary policies.

      Some great points raised. Thanks for stopping by and sharing.
      R2R

  16. TRAITOR!!!!!!!!! SELL OUT!!!!! LET’S SHAME HIM!!!!!

    I wish you luck here, R2R. You took a much different approach than I did (even my dividend cutters were due to short term issues rather than long term ones), but if your portfolio was keeping you up at night, then what’s the point of it? Investing shouldn’t be stressful; it should eliminate stress by helping you achieve financial freedom.

    That said, I’m not too keen on holding cash. Not that much of it, at least. Money that’s just cash isn’t just NOT growing for you, but is being eroded by inflation. In the long run, the ability to sleep aside, does that really bode well for long term investing?

    We should be worrying less about short term economic events (not that we should turn a blind eye to them) and buy/sell each company with the long term in mind. Will people still be using iPhones 20 years from now? Toothpaste? Oil? Those are the questions I ask myself long before anything about China or Brexit comes to my mind. Interest rates will be interest rates, but I am confident that MCD will be selling hamburgers a decade from now.

    At least you took a nice profit from your sales. And your reasoning is sound, so I can’t say you did something crazy.

    Sleep well!

    Sincerely,ARB–Angry Retail Banker

    • Haha…I know that I have broken the one rule that dividend growth investors arent supposed to do. Sell and take profits! As I have mentioned, I still like the idea of DGI and 2/3 of my portfolio is still invested. Getting married to an idea just because I liked it and has worked in the past seems like a recipe for disaster. Its one of hte reasons why I am hedging my strategies — with my wife’s portfolio invested via index funds instead of DGI stocks. Taking some cash off the table just seemed like the logical step at this point in time. I may as well have made a mistake … who knows? Time will tell. But I sleep better at night knowing that I have cash ready to move and have booked some profits during this market cycle.

      You are right in stating that we should not turn a blind eye to economic cycles, but having gone through the financial crisis has been the best lesson I could have imagined. Its something that I will never forget. At that time, I did not understand the fundamentals well enough and kept buying the big banks — legendary names that had existed for decades — besides, those banks were very important to the overall economy, and everyone needs banking right? I bought stocks in WaMu, Wachovia, Merrill Lynch — and saw day after day those stock prices collapse towards 0.
      As it stands, the fundamentals in the market do not any sense and for more than a year, I havent really had a conviction buy…I wouldnt put any new money into the market — so leaving the invested money there also does not make any sense. That has been a big driving force into me taking some money off the table.

      Who knows what the world will look like in 10 years, let alone 20 years. iPhone may not even exist as a product. Remember when iPod was the cool new thing not that long ago. Toothpaste – yes we will probably still need it. Oil — I am not too sure it will be that big a part of the economy in the future. If I had to take a guess, it would be a small niche market. Times are achanging. Fast. Portfolios have to be adjusted accordingly. I know most investors suggest not to pay attention to the macro economy, but I disagree with that. Investors if they ignore cant see the forest for the trees.

      Best wishes
      R2R

  17. Hey R2R!

    I miss the big post. Was on holiday. My oh my…

    I am surprised by your move, but totally approve. If investing makes you have insomnia, then you know it’s not right and you should arrange things so you can sleep well. Period.

    Is it Market timing, will you lose out on future profits, are you doing the right thing… who care, as long as it sits right with you.

    Some of the things you said really resonated with me: the whole #3 intitled simplicity for instance. As you might know, at the beginning of the year I sold a few individual stocks and started investing in Index funds. It’s not so much I didn’t like these stocks, it’s because I didn’t have time nor the energy to closely monitor all of them. I now own 20 stocks and funds and that’s more than enough.

    So congrats to you on your move if it makes you sleep better at night. As we grow older, our night of sleep get more and more complicated… might as well toss aside the things we can control. Heck, you might even buy your olds stocks at half the price in a year or so… I’m kind of sad to see a POW shareholder go, but I’m confident you will come back one of those days!

    Cheers!

    • Hi MD,
      Yeah…the simplicity was a big part of the decision. After the birth of our baby daughter, I find that most of my free time has vanished and I expect more of that going forward. I enjoy reading and following companies and their progress and I had the time in the past…but its something that I am not able to keep up with. even following 20 companies seems like it takes up a lot of my time.
      POW is a great company and I will be looking to buy it possibly in the future…theres not much money to be made in this low interest world as an insurance company.

      R2R

  18. Ian S says:

    Yes, I get the cash bit, i think that is too much gold though. Think that dividend stocks are in a bit of a bubble so your approach is sensible. It is difficult finding compelling investments at the moment as valuations are high. The only thing that I wouldn’t sell is Apple, but you have a good thesis, and I respect that. Differing opinions is what makes a market after all.

    • Thanks for stopping by and commenting, Ian. You hit the nail on the head — there will always be differing viewpoints…that is what makes a market. For the most part, I am not too confident in this market as I see shaky fundamentals, but the majority sees otherwise — it will be interesting to see how things progress.

      Happy hunting
      R2R

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