Year End Wrap-Up, Rebalancing and Review

This year has been a decent year for investments in the stock market. Most notably our yearly dividend income has gone from around $1500 to about $2210. This is an increase of $710 and if this rate is sustained for the next 4 years, I will have attained $5000 of yearly dividend income at age 55 - $1000 more than I had set as a goal last year at this time. The plan which was layed out is being executed and it is WORKING. Now it is a matter of continuing to execute the plan. Merry Christmas and Happy New Year - see you next year!

November Activity and AAPL

I have been in and out of AAPL for about a year. I recently purchased 10 shares at 525 and immediately sold a put to get 10 more at 500 which lowered my cost basis to 515. I'm glad I did. AAPL appears to be breaking out even before the China Mobil announcement which will bring some 700 million more customers and another bump in share price. Then there's the holiday sales which played into my buy decision.

This is an amazing deal at a time when the market is at all time highs and even fair deals are getting difficult to find. STRONG BUY.

Other recent action-purchased 100 CAT@84, immediately sold covered call @86, CAT lowered guidance, sold at 84.20, collected premium on call. Sold put on DE@82.50.

Happy Thanksgiving to all!

October Activity and Investing Goals

October activity has been limited to reopening a small position in CVX at $118/share. AAPL has some serious positive momentum into the holiday season; I may reopen a position there.

What are your specific investing goals? Are they changing every day, depending on what happened that day? Or do you know that some parts of your life will not change and invest with that in mind?

Some people cannot define their goals beyond "I want to be rich". It is hard to make a specific detailed plan based on such a general goal. In my case, I want to generate safe stable income when I retire for myself but more for my family. I would like to generate $20k in dividend income from companies that have never cut their dividend. I don't believe this is realistic so I will get as close as possible. This means growing the portfolio fairly quickly but without too much risk since I do want to sleep well at night. I will be 51 in a month and have a few years of work left. By specifying what exactly you are trying to do by investing, you are now more able to take the specific GOALS and use them to come up with a PLAN. Without doing this, you are kind of like a day trader....gee, I hope I make some money today in the market. But by doing this, you will understand that market variations need not create a panic and rush to the exit door; you will have clear thinking and a cogent plan to implement with your holdings regardless of pullbacks or dips, in fact you will view dips as rare opportunities to increase your high quality holding which you have worked hard to acquire and collect at bargain prices all along. To summarize;

My Goal-generate $20k/yr income in retirement by investing in companies with a safe and growing dividend. At 4% yield, this would require a portfolio value of 500k. This is not realistic, therefore I will get as close as possible while minimizing risk.

MY Plan-Research and acquire stock in companies with a history of growing earnings and dividends. Companies on the CCC list are good candidates.
Establish a core of 5 companies that are not to be sold unless there is a fundamental change in their business such as a dividend cut or several years of missed earnings. These 5 companies are the anchor of the portfolio.
Add 10 or so businesses that follow the rules I have defined earlier regarding payout ratio, pe ratio, dividend yield and other metrics. One or 2 of these may be faster growers, smaller in size or market cap, younger in age, lesser dollar value per share (~$10 or so), with more rapidly growing earnings and dividends.
Specific buying and selling rules are available upon request.

What is your goal? What is your plan? Comments welcome!

September Activity - volatility

We are looking at a volatile time period with Syria, Bernanke successor rumors and bond buyback tapering. I intend to do as little as possible to my portfolio. A portfolio is like a bar of soap-the more you handle it, the smaller it gets. This would be a great time to reread and refine the business plan/mission statement you wrote for your investments -

I close with the following discourse lifted from the pages of an SA article by one of my favorites, Todd Johnson;

Five stocks CAT, KO, MCD, PG, XOM  that have performed very well over the last thirty years were examined and found to have performed well over the last thirty years.

The question I'd like to have the answer to is: how did five typical stocks that had performed well over the thirty years ending thirty years ago perform in the next thirty years?

Might they have included Polaroid Land, NCR, GM, and other blue chips? 
 
 
 
@Victor ... >>> Might they have included Polaroid Land, NCR, GM, and other blue chips? <<<

I have studied this extensively! Those companies were not dividend growth companies, they were simply companies that paid a dividend. That's a huge difference!

I focus on the dividend growth, and it's the dividend growth that will provide the clues as to whether a company is in financial trouble or not.

When you have a company raising the dividend 7 to 9 percent every year, the cash has to be in the bank.

When a company that used to pay a 7 to 9 percent increase every year, drops to 3 to 4 percent and the payout ratio rises, there's your caution sign! Time to monitor.

If the dividend growth goes lower or the company freezes the dividend, then it's time to sell. The company may not go under, but I won't give them a chance to either.

Maintain the historical dividend growth patterns or it's time to move on. It's as simple as that.

I have the success formula that NEVER fails.

High Quality + High Current Yield + High Growth of Yield = High Total Return.

If one of the criteria to that formula is missing, time to consider selling.

August Activity - Arena Pharm, COP, PSX and XOM

Arena finally came alive and popped 8% yesterday. The sales numbers are coming in for Belviq and they are average but it is still very early. Patience is the key here. I believe we are looking at a huge upside and only a limited downside. I am holding until at least December but probably for years beyond. Just wait til the ads hit TV and the web..... 

Since COP has divested its refinery operations as PSX, it has now basically become an upstream E&P company and not an integrated oil company. It's share price (and to some xtent its value) is tied more closely to the price of oil and natural gas. This is riskier than before. I have held it as a core holding up to this point but I am now rethinking it. I want my core to contain stocks with safe and growing dividends from companies with huge competitive advantages and large moats. I intend to add an integrated oil major into my core holdings-probably XOM or CVX. I have a put in on XOM at 87.50 in September.

I close with the following excellent statement from SA;

I personally think DGI is a good method for do it yourself investing. The approach is logical, relatively simple, and at SA the interested investor can find sufficient information to do a workmanlike job without going crazy. Read some DVK, get the CCC list, subscribe to Fastgraphs and Morningstar, don't put all your eggs in one basket, listen to Chuck Carnevale about not overpaying, then work, save and invest. It will greatly improve your odds of having money when you need it.

July Activity

Bought 10 shares of AAPL at 419. Sold LINE at a loss due to SEC inquiry into it's accounting practices-prices continue plunging after I sold. Sold some puts and a covered call on BMY.

Here's an interesting quote from 'The Intelligent Investor' followed by a statement by the article author;

Graham writes that the typical investor "would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other person's mistakes of judgment." Zweig expands on this: "If, after checking the value of your stock portfolio at 1:24 pm, you feel compelled to check it all over again at 1:37 PM, ask yourself these questions:
· Did I call a real estate agent to check the market price of my house at 1:24 PM? Did I call back at 1:37 PM?
· If I had, would the price have changed? If it did, would I have rushed to sell my house?
· By not checking, or even knowing, the market price of my house from minute to minute, do I prevent its value from rising over time?"
This is the crux of the "Oh, cool," dogma. Tell me the market is crashing. I really don't care—all it means is that right now, a bunch of people got freaked out and threw away money. It means some lady in line at Chipotle opened up her eTrade App and unloaded a few hundred shares of GM right then and there. That means she lost. And when I get back to the office and buy GM at $24—value investing at its easiest—well, that means I win.

June Activity

The markets went on a wild ride after Bernanke's statements at the FOMC meeting. Today the Dow pulled back 350. Is this an over reaction by the crowd or will there be more? Buying opportunities are starting to appear and this is no time to get emotional. Hold your keepers and buy more if the price gets in the buy range. For your shorter term stocks, use options-in a down market, sell covered calls to get some income as long as you are willing to part with them. Core stocks may approach a buy-JNJ, PG, COP, T, MCD, KO but I'd wait for the return to an upward direction. I am looking at CAT and XOM at the moment and have put options on them.

May Activity - interesting times ahead

Sold and repurchased AAPL, lowered cost basis by $6 a share and collected dividend. I'll continue using trailing stop loss on AAPL as I ride it up and down the range it is in. Covered call expired on ARNA, received premium. Cash secured put expired in LINE, received premium. Opened put on CAT, strike price 82.50 in June.
Watch ARNA, June 7 release of Belviq followed by preliminary sales numbers. ARNA also has off label prescriptions possible for Q for diabetes. Other drugs in pipeline for pain relief and alzheimers. ARNA is a keeper for now and probably for a long time-lots of good things possible there including a buyout from one of the big pharmas.
LINE took a dive after some bad press from Barron's-loaded up on the dip. I will now do some covered calls on LINE after the price recovers. It is an upstream MLP, upstream meaning it does exploration and production of oil and gas. This is different than a midstream which does transportation and storage (like KMP, which we own). Midstreams are more predictable and less prone to commodity price change effects. I plan on selling LINE thru calls and picking up MMP or EDP which are midstreams that also have no general partner so they keep all of their profits. BTW downsteam MLP's exist and they do refining-there are only a few of them. The oil majors are entering this entire space.

What if....? and March/April activity

I was reading my favorite financial web site and going over the commentary that followed an article from a favorite author. A civilized but pessimistic investor asked the doomsday scenario questions that dog all of us from time to time; what if American prosperity is at an end, what if there is a depression and no recovery, what if permanent recession is the new normal? Here is a link to the entire article and comment thread-

http://seekingalpha.com/article/1339941-the-dirty-secret-about-the-1929-stock-market-crash


I just received an options assignment for GE, 200 shares. I'm glad-it looks reasonably valued and they have a projected 10% dividend increase in the immediate future. PE~15, P/B<2, 3.35% dividend, 220B market cap, RSI~35-to me these are good numbers. GE is an industrial that manufactures turbines and jet engines, medical devices and appliances and a conglomerate-they recently acquired Lufkin to increase their oil, energy and drilling services space. GE Capital is their financials which they may spin off. They beat estimates and still took a 4% beating yesterday-ripe for a comeback.

I sold off SPLS and F. I'll re enter on F if it pulls back. Still waiting for ARNA release, using options on ARNA to generate capital. I sold both a call and a put on it-put just expired. Put on XOM expired. CAT looks interesting at ~80.

Charlie Munger and Ben Graham Reveal the Secrets to Getting Rich

http://www.gurufocus.com/news/212440/charlie-munger-reveals-the-secrets-to-getting-rich/affid/81000

http://seekingalpha.com/article/1296131-benjamin-graham-s-4-commandments-of-defensive-dividend-investing

Valuation and earnings estimates

I just read another great article from Chuck Carnevale on Seeking Alpha. I highly recommend investors take the time to read Forecasting Future Earnings. A quick recap is that Chuck states that checking the analyst consensus earnings estimates is a starting point to determine future price action. Msnmoney.com could be used to do this quickly; just enter the ticker and click on Earnings in the left column.
For short term price action, traders use earnings 'misses' to buy on a short term dip. They then wait for the price to recover and then sell. 5% or more can be obtained doing this. Earnings 'surprises' are a short term driver of prices. For longer term buy and monitor investors, the 1,2 and 5 year estimates are a good place to start when looking at a business. This earnings guidance is obtained by the analysts from the management of the company among other places. It is good to keep in mind that 1.) the analysts get paid to do this and want to do their job well and 2.) the management giving the estimate information want people to buy their stock. If they overestimate and there is a subsequent miss on earnings, stock price goes down and people sell. Therefore management often underestimates earnings estimates-something for investors to keep in mind.

There are lots of other drivers of prices-lawsuits, natural events and disasters, politics, etc that have nothing to do with earnings or earnings estimates. Due diligence is performed by paying attention to these and other factors.

The article also states that near term estimates are generally more accurate than longer term estimates and that total accuracy of the estimate is not the point. If the estimate is a few pennies off this should not affect our thinking as long term investors. The main point is that earnings are increasing.

To summarize, this entry is about business results and really not about price volatility. Price and research firm recommendations like Reuters and Value Line are a separate issue. Using earnings growth estimates can be useful in determining which business to choose when investing. Read Chuck's article for more info.

Investment words from Motley Fool

The following from Motley Fool (www.fool.com) really sums up things well; the valuation text addresses something I never knew about the worth of a company and it's stock;


While luck can't be completely eliminated, you can follow a time-tested approach to reduce its impact and increase the chance that the money you earn from investing, you earn on purpose. This approach traces its roots to the heels of the Great Depression and Benjamin Graham, the father of Value Investing and the man who taught Warren Buffett how to invest.
The three parts to this Graham-inspired strategy are straightforward on their own, but they really gain their power when all three are used together. Those keys to investing success are:

• Dividends
• Valuation
• Diversification 

Here's why each matters, and how they work together.
Dividends
Dividends are cash payments made to investors to directly compensate them for the financial risks they're taking for owning stock. Not every company pays a dividend, but once a company starts paying a regular dividend, it represents not only cash in investors' pockets, but also an incredibly clear signal of the company's prospects.
Take General Electric (NYSE: GE  ) as a prime example. The company was once incredibly protective of the dividend that it had maintained for decades and increased annually for over 30 years. When its overexposure to subprime debts during the financial crisis tripped up its own operations, one of the earliest public signals of just how bad the damage was came from the company's dividend. After decades of clockwork annual raises, it held the dividend steady for six quarters, before finally cutting it.
Similarly, electric generating company Exelon (NYSE: EXC  ) tried to protect its at-risk dividend before finally succumbing to a cut. The saga unfolded in public over several months, as investor speculation and company statements hashed out whether the payment could be maintained, and under what circumstances.
Dividends may not be guaranteed payments, but in both of these cases, company management made it clear that they know investors watch their dividends and carefully analyze changes to policy. That both companies somewhat telegraphed their difficulties via their dividends shows how those payments can provide not only direct financial rewards but also powerful signals of what's really happening.
Valuation
One strategy Benjamin Graham favored was buying stocks trading below their net current asset values. His theory was that any surviving company should be worth at least that much, and any dying company should be convertible into somewhere in the neighborhood of that amount of cash when liquidated.
While that strategy worked well for him when he invented it, in these days of ultrafast computerized trading, the companies that trade at those levels generally do so for really good reasons. Take the giant banks Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) . Looking just at their market prices and tangible asset values, they appear to be incredible bargains:

Company	Market Capitalization	Net Tangible Asset Value
Bank of America	$129.7 billion	$161.6 billion
Citigroup	$132.8 billion	$154.9 billion

Source: Yahoo! Finance as of Feb. 16, 2013. 

Yet in the topsy-turvy world that is bank accounting, the largest asset on their books is other people's and business' debts: mortgage loans, business loans, credit card loans, etc. For those assets to really be worth their book values, the borrowers behind those debts need to reliably make their payments. It wasn't that long ago that both of these companies nearly imploded when more people than expected stopped paying on their mortgages, triggering the recent financial crisis.
Still, whether it's looking at tangible asset values or some other method of estimating a company's true worth, looking for legitimate value can reduce your risk of overpaying for the companies you buy.
Diversification
Since dividends aren't guaranteed and valuation methods can only protect you so far if a company falters, you need to diversify your holdings across industries in order to spread out those risks. Diversification doesn't eliminate the risk of a company going bad, but it does reduce the impact of any one failure on your overall portfolio. The upside of diversification is that protection, but the downside is that it also mutes the gain you get if any one of your companies dramatically exceeds your expectations.
Dividends and valuation are the tools that can help you find companies worth owning based on the real money they're generating and paying to shareholders. Diversification is the tool that protects you when something goes wrong. Use all three together, and you have a strategy centered on making money on purpose. Isn't that better than throwing your money at the market and hoping you get lucky?

February activity - valuation

I have no plans to trade in February. Current prices are not in a buy or sell range as far as I can tell (valuation based on pe, price and earnings history and payout ratio). I may issue a put or a call if I see the right numbers but I am content to watch the dividends come in at this point. ARNA is oversold now but it should be in the pharmacies this month which will generate a bump in price. F is hovering around 13. GLW would be a buy at 11.50 or 11. Stocks to watch - ARNA, F, GLW, COP.

January activity

I did the following transactions immediately before the fiscal cliff resolution; I already had a position in KMP and just added to it. I opened positions in LINE and PPL. I did not feel that any of my core positions were in the buy range or I would have added to them.KMP is now 87.25, PPL is 28.95 and LINE is 37.11. I also bought back a covered call I had sold on F which was just upgraded and doubled their dividend!

12/28/2012

YOU BOUGHT

KMP

KINDER MORGAN ENERGY PARTNERS L P

Cash

Shares: +10.000

Price: $78.38

Amount: -$791.75

Settlement Date: 01/03/2013

12/28/2012

YOU BOUGHT

LINE

LINN ENERGY LLC UNIT REPSTG LTD LIABILI

Cash

Shares: +50.000

Price: $35.41

Amount: -$1,778.45

Settlement Date: 01/03/2013

12/28/2012

YOU BOUGHT

PPL

PPL CORP

Cash

Shares: +120.000

Price: $28.38

Amount: -$3,413.55

Settlement Date: 01/03/2013