Low yield bonds mean you should hold more stocks...

  "The reality is, long-term bonds match up well with a retiree or foundation’s liabilities (i.e., future spending needs). They move in lockstep. But it’s important to note that the counterbalance that bonds provide is not as reliable and impactful as it used to be. Previously, when stock markets were taking a hit, bonds went up automatically (i.e., yields dropped). But in August, when volatility jumped and stock markets were down 4 per cent, Government of Canada bonds also had a negative return (minus 1 per cent)."

Link - Steadyhand funds

Value is poised to outperform

Franklin Templeton put together a great report on value stocks underperforming growth stocks since the financial crisis. It's exciting because it suggests that value stocks are poised to outperform in the near future. 

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"Value has underperformed growth for the longest period on record and as of August-end was trading at the widest valuation discount to growth since the Dotcom Bubble of the late 1990s. This is unusual, as value investing as a style has historically outperformed growth more often than not. As major global central banks contemplate policy normalization over our long-term investment horizon, we see a strong case for a potential recovery in value from currently depressed levels."

 http://www.ftinstitutional.com/downloadsServlet?docid=if6u38gb

Recommended Reading: Finding Bargains Among Stocks With Falling Stock Prices

I like this article from AAII and Luke Wiley (he has a very similar book)

 "Inversion. Such a simple concept. If there is a problem to solve, consider all the solutions that won’t work. In so doing, the correct answer reveals itself. When I first came across the above quote from 19th century German mathematician Carl Gustov Jacob Jacobi, it resonated with me. This way of thinking in reverse seemed to speak to the way I made decisions. Want to lose weight? Think of all the behaviors that will lead to obesity and do the reverse. Want to be a better father? Think of the things that would turn one’s kids away and do the opposite. Jacobi’s maxim seemed most appropriate to my career in finance, particularly as it relates to investing’s golden rule:

Buy low, sell high."

http://www.aaii.com/journal/article/finding-bargains-among-stocks-with-falling-stock-prices

 

Benjamin Graham's Defensive Investor Strategy - July 2015

Benjamin Graham's Defensive Investor Strategy was discussed in his most popular book, The Intelligent Investor. At Columbia Business School, Professor Graham taught Warren Buffett & other professional investors who have outperformed the market.

Mr. Graham describes the Defensive Investor Screen as (Chapter 14, The Intelligent Investor)...

  1. Adequate Size of the Enterprise - $100 in annual sales ($50 million for a public utility)
  2. A Sufficiently Strong Financial Condition - a current ratio greater than 2 & long-term debt should current assets 
  3. Earnings Stability - positive earnings for in each of the past ten years.
  4. Dividend Record - Uninterrupted payments for at least 20 years.
  5. Earnings Growth - "A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end."
  6. Moderate Price/Earnings Ratio - "Current price should not be more than 15 times average earnings of the past three years."
  7. Moderate Ratio of Price to Assets -"Current price should not be more than 1½ times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5. (This figure corresponds to 15 times earnings and 1½ times book value. It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)"

My version of the screen modifies the suggested screen slightly. I target companies with:

  1. Revenues greater than 400 million
  2. Current Ratio greater than 2
  3. Debt/Equity less than 1
  4. Dividend history of at least 10 consecutive years
  5. Dividend growth rate in the last 5 years
  6. Price/Earnings less than 15
  7. Price to Book Ratios less than 1.5

As of mid-July, four stocks met these criteria, including:

The shape of fudge

I enjoyed the story below from alpha architect's review of Ben Carlson's new book - A Wealth of Common Sense. 

"Ben highlights the importance of framing an investment decision in the context of an academic study where researchers ask students to eat a piece of fudge shaped like a piece of dog crap (pg. 52). If that doesn’t make you laugh, then you may be taking yourself too seriously.

Anyway, not surprisingly, students don’t want to eat fudge when it looks like a dog turd.

But why not?

Fudge should be considered a great thing if it actually is a great thing, no matter what the shape. However, that is not how the human mind works. In many respects, investing in value stocks, which are often framed as loser stocks with no redeeming qualities, is analogous to eating great-testing fudge that is in some distressing form (like a dog poop). Whereas, growth stocks are more akin to dog turds shaped as chocolate bars–yum!–everyone wants to take a bite!"

 

http://blog.alphaarchitect.com/2015/07/08/book-review-wealth-common-sense-ben-carlson/

 

 

Q2 Newsletter

I’ve decided to start a twice yearly newsletter. I hope you find it valuable and interesting.

In this edition, 

1 – US EQUITY VALUATION

2 – WORLD’S CHEAPEST STOCK MARKETS

3 – US STOCKS FOR THE DEFENSIVE INVESTOR

4 – A HIGH-LEVEL REVIEW OF ANNUITIES AND ANNUITY ALTERNATIVES