Vs Low cost ETF basket

This is my trading notebook, I am not an expert investor, so please do your own research.

Thesis

I have been happy with the overall performance of Basket Cs. It is kind of a mixed bag, but when the Charles Schwab brokerage opened their own ETFs and made them free to trade, I started putting money into them, a bit at a time, usually on dips. The worst performing one for the day gets a little bit of money, 5 - 10 shares is common. I can do this because there is no commission. However, there are other brokerages that have ETFs that are free to trade. I think this makes a lot of sense. Paying more does not mean I get more. One of the things I want to concentrate on is Vanguard ETFs. They have a low overhead, sometimes even lower than Schwab, so if I can combine that with a low or non-existent commission, more of the money is focused on investing instead of paying brokerages and fund managers. And of course if there is a dividend, everything is really groovy.

Here is the practical application. Get a list of their ETFs.
If I had $50,000 to invest I could take the list of ETFs and divide $50,000 by the number of ETFs and try to invest about the same amount in each ETF. There is no requirement to actually do all of them, but it would be wise to make sure there are global focused ETFs and US focused ETFs. Then using the cost basis screen start tracking which ETF is getting hit the hardest and as money is available, buy another share. If I am patient, I can do most of this with limit orders and try to get that equity as cheaply as possible.

Would I consider mutual funds? I have a bias against mutual funds, however I would like to have some municipal bond coverage and I have not found an ETF that does that on Vanguard, so in that case I would.

Rules of the basket

• Think maximum diversity, use equal starting investment dollar amounts when possible.
• Limit orders for all buys, there is plenty of time and bull markets do not last forever, it is highly unlikely we will miss the bus forever.
• If an ETF is getting clobbered take a close look, compare it to similar non-Vanguard ETFs and if they are tightly correlated consider adding to that position with an aggressive limit order. What goes down will likely come up over a long time horizon.
• ETFs are preferred over mutual funds, but if we want coverage of a specialty area mutual funds are allowed.
• This is an expansion on the Cs strategy, be very patient, fire bullets not cannon balls.
• Taking a page out of the Ts strategy, money can be on the sidelines, but it should be tied to deep limit orders, at least 10% drop.

7/31/15 WFC 50 Limit @ 58, executed, VDE 100 Limit executed at 99.71, AAPL 100 Limit @ 122.00 executed, VWOB 25 Market 76.88.

4/30/15 Added to my VTC (health care) position.

3/3/15 VSS, (world small cap ex US) is the worst performing ETF of the system so I put in a limit at 98.00 Last Close 100.32.

2/27/15 Vanguard total stock ETF closed, the market was down a bit and it was enough to cause the limit to hit @ 109.00. I have three open orders as I try to fill out my portfolio:
VEU ( all world ex-US)
VXUS (total world)
VIS (industrials) Limit 100.00 Last Close 108.97 and it is up 5.5% in the past 30 days, but I think being patient for now is the right course of action.

Long term studies have shown the importance of investing outside of the US. Right now the US stock market is outperforming global, but changes will occur. The most important open order to me right now though is VIS, need to keep an eye on that one.

2/25/15 Closed my credit union account and mailed a check to Vanguard 2/18/15, but the winter weather has messed things up. However, according to USPS tracking it has left the post office and is in transit.

2/24/15 I had enough money left to open a minimum volatility mutual fund VMVFX. The thesis is this has been a long bull market run. It could end tomorrow, go on for another year, who knows. These are big stable stocks that historically do better in a down turn and capture most of the upside in a bull market. This is a defensive position and when I get some more cash, I hope to add to this position.  Last close 11.53.


2/23/15 VWOB executed @77.00 Last close 96.91

2/21/15 Existing open orders
VEU (All world ex US) Limit 48.00 Last Close (LC) 49.54
VTI (Total stock market) Limit 108.00 LC 109.28 2/23/15 changed limit to 109.00
VXUS (Total international stock) Limit 49.00 LC 51.18
VWOB (Emerging markets gov't bond) Limit 72.50 LC 77.20 Changed limit to 77.00
VIS (Industrials) Limit 100 LC 109.90 52 week  92.90 - 109.91 Hold
New order
VNQ (Reit) Limit 83.25 LC 84.61

2/20/15 VDE (energy) closed, 113.00

2/18/15 VGK (FTSE Europe) closed, 59.09.

2/17/15 BNDX closed, so did EDV.

New position, time to play Europe assuming a limit will hit.
VGK 370 Limit 54.70 Last close 54.96

2/11/15 Limit close on EDV 129.73 Last close 129.75

Open Limits:
VTV (Value) Limit 78.50 Last close 84.38 Up 4% over past five days, consider sweetening the bid.
VWOB (Emerging markets bond) Limit 72.50 Last close 76.51 Down .39% over past five days, wait
VIS (Industrials) Limit 100.00 Last close 106.39 Up 3.62% over past five days

New limits:
BNDX (International bond), Limit 53.60 Last close 53.63
VXUS ( International stock ), Limit 49.00 Last close 49.34
VTI (Total stock), Limit 106.90 Last close 106.93

2/9/15 Limit close on VPU bought at $100.00 2/11/15 close 99.88

1/30/15 Apparently I have been sloppy with my documentation in this basket. I just got some trade confirmations and no discussion of the setup of the trade. Will recover to the best of my ability. The confirms are for:
VDC (consumer staples) closed at 124.00 Last close 123.44
VIG (dividend appreciation) executed at 78.50 Last close 78.42

Set a limit for VTV (Large cap value), VDU (utilities)
VTV Limit 78.50 Last close 81.03
VDU Limit 100    Last close 104.58

1/10/15 Energy positions have been trashed and I think it is time to buy. The Vanguard ETF for this is VDE. Don't want to pay too much so we will use a limit:
VDE 200 Limit@104.00 Last close 107.96 Good till canceled

4/23/14 An account is now set up and ready and funds have been received, so it is time to start.
Equity US, Regional International

70 MGC M@56.42 (mega cap)
55 MGK M@72.83 (mega cap growth)
70 MGV M@56.42 (mega cap value)
17 VO M@112.68 (mid cap)
20 VSS M@107.88 (small cap, global ex-us)
18 VB M@111.38 (small cap US)

Low Volatility
50 VMBS M@ 51.97 (mortgage backed, low volatility, slow growth)

Sector Specific
20 VCR L 104.00 L 104.93 (consumer discretionary)
20 VOX L@82.5 L 83.17 (telecommunications)

Bond ETFs
25 BND L@81.4 L 81.49 (total bond)

1/8/15 Global
Obviously the US outperformed most of the world in 2014, but I want a wider exposure, despite what happened in France today, there is more good news than bad news. I am going to start with a wide net and pickup VTWSX which is total stock.

Amazon (AMZN)

We are overweight with Amazon. As a person that travels for a living, I like being able to buy things and have them appear where I need them. Right now, Kathy is primary purchaser of things, the Amazon Prime member.

The problem is that two recent orders, both of fairly expensive items have been screwed up AND there does not seem to be a recourse. In both cases it was not Amazon itself, it was a retailer that works with Amazon, but I still got stuck.

I ordered two 24v batteries, they sent 18v batteries, filled in the form that this was not what I ordered, went on travel and for whatever reason still have 2 18v batteries. They are a different form factor than the 24v battery so eventually I gave up and bought an 18 v weedwhacker. All in all I am down $350.00 and trying to figure out what to do with a useless 24v weedwhacker.

More recently we ordered a shillelagh; never arrived. Filled in the form, have heard nothing. Probably down about $100.00 in this adventure.

I am not the kind of person that let's one incident cause me to scream and shout that I will never do business with Amazon again. However, the rich question is, are these isolated incidents, or is their business model unraveling and my investment thesis with it?

Retirement Strategy in Basket (Cs)

NOTE: This entire blog series is my trading notebook. I am NOT an expert investor, so be very careful trying to learn from me, I am just taking steps to make my notes and research available to myself and close family. You are very welcome to read and comment and even tutor me should you feel gracious :) The overall strategy is listed at the bottom of this post.


6/6/14 SCHH dropped a bit, 5 Limit 35.70 Last close 35.86.

5/15/14 hoping for friendly dips
20 SCHM 37.00 L 37.62
20 SCHA 49.5 L 37.62
20 SCHB 44.00 L 45.37
20 SCHG 45.00 L 45.89

4/23/14 The market was a little soft today, but since there is no trade commission for these I added a little bit on dips, SCHH 10 M, SCHA 10 M.

4/2/14 Received the Matthews fund prospectus by email today. This basket has MAPTX, the Matthews Pacific Tiger fund (Asia/PAC ex Japan). According to the prospectus the 1 year performance was 3.63%, 5 yr 18.96% and 10 yr 12.68%. Inception was 9/12/94. I have held it for a bit over 5 years. I do not normally like mutual funds, but I don't really want to try to study the region. The expense ratio is on the high side 1.11%, but I have not found anything better to date. It has a four star overall Morningstar rating. The big news was the intro note from the President and CEO, they are soft-closing Pacific Tiger to new investors.

3/11/14 SCHA 10 M 54.06.

3/4/14 The market is very happy today. Needless to say, it can't continue like this forever, but WOW. OK, keeping fully in mind no one can time the market, here is my strategy. I can't time the market, I do not have Wall Streets mainframe computers, but many online brokerages will let you set an email alert. So while things are going up and up and up, I can set limits for when they come down. As has been said many times, there is no trading fee so I can work with small amounts, the trade hits, and I get an email alert and decide whether to make a larger investment. Current order status:
10 SCHA L@ 46.50
15 SCHB L@ 42
30 SCHC L@ 30
25 SCHE L@ 23
50 SCHE L@ 17.5
25 SCHF L@ 27
15 SCHM L@ 35.5
10 SCHP L@ 53.6
10 SHCP L@ 53.65

Why do we have two SCHP orders so close together, if I get lucky and this dips, I have two chances to pick up on the state change.

2/21/14 DSUM dropped a bit today. 100 market@25.32. SCHP 10 L@53.65. LC 53.71.

2/11/14 TIPS bond ETF. I have dumped most of my bond funds in favor of actual municipal bonds. But I still have this one and it is dropping. I can trade SCHP with no commission, so small orders are common in this basket. 5 L@53.75 LC 53.89.

2/3/14 Market is a bit off. Put in some limits, the numbers are small since there is no trading fee for these, all reinvest dividends, all GTC. 15 SCHG L43, 15 SCHB L42, 25 SCHF L27, and the last is a bigger bet and a deeper limit since this is an emerging market ETF 50 SCHE L17.5

12/21/13 Analysis of the basket. There are no moves to make. It is up almost across the board. There are no losses to speak of to offset the gains. Four of their ETFs show negative at the 90 day window and two: SCHE, (emerging),  and SCHH, (REIT) are overall down. All purchases are Market to ensure they "hit": SCHO 10, SCHH 10, SCHP 10, SCHE 5.

11/30/13 SCHH, the Schwab ETF for REITs took an almost 1% drop on Friday. Set up a buy for 20@Market. Keep in mind that if you use the Schwab platform there are no trading fees so small adjustments are possible.

11/29/13 SCHP, the Schwab ETF for TIPS has been dropping. Picked up 10 shares @ market. Inflation has to happen at some point, though I agree you can't see it in the numbers right now, but as ideal buying opportunities become available, it makes sense to have an inflation shield.

8/2/13 Exxon (XOM) dropped 1.23%, Limit for 25 @91.25. SCHD (Dividend payers) dropped just a tad, Market for 10 shares @34.42.

8/1/13 SCHH (REIT) dipped a bit though it is still positive, bought 10 shares@market 32.24.

8/1/13 SCHP (TIPS) is my only bond fund anywhere and it finally went negative which is what I expected. My plan is to keep my powder dry and set up a calendar event for 45 - 60 days from now and add to the position then. I can't time the market, but I do expect it to drop a bit more LC 53.91.

6/1/13
Market finally dipped a bit. 10 shares SCHE@Market, 10 shares SCHF.

4/20/13 I did profit taking on Chevron (CVX), but forgot about the ex-dividend date, so I ended up with a fraction of a share. That clutters up my screen and also has kept Chevron on my mind. Set a limit for 20@115.00. Part of the thesis for this stock is that according to this web site, its Graham number indicates it is a value buy. So this is a long shot, but I put in a limit for 105.00, it last closed at 115.90, so the odds are fairly low, but if you don't ask ....

If you live by IBM, you die by IBM. This has been the most successful stock in this basket. On Friday it dropped by 17.15 8.48%. Apparently based on some analyst's downgrade. Well, I am not that smart, but in a bull run, you buy on dips 15 shares@Market.

4/15/13 The market had a significant drop today, likely related to the Boston Marathon Bomb. Our prayers are with the injured and those grieving a lost one. We added to our position with SCHA, SCHM, SCHC and VBR.

Update March 30, 2013
The four lowest performing equities in Cs. The good news is that everything is in the green because the market is way up. The bad news is some of these are just barely in the green.
SCHO Intermediate Treasury +.42 1.36% of basket
SAMBX Floating rate +.44 10.01% of basket (just added, no need for concern)
SCHE Emerging Markets +0.94 3.15% of basket
SCHZ US Aggregate Bond +1.53 0.53% of basket

Are there better candidates to replace these in the Schwab universe? No, I have all of their ETFs, but they now have commission free ETFs. In the bond section I found three interesting possibilities:
BKLN, a senior floating note ETF
CWB, a convertible ETF
DSUM, which invests in Chinese bonds in the RMB (Renminbi) denominations. My portfolios only have a minor exposure to the world's second largest currency and it pays a dividend, so it looks useful for long term retirement income. Let's compare to my two laggard bond ETFs.
             30  90 180 365
DSUM   1    1   1    1
SCHO   2    -    -     2
SCHZ   3     2   2    3

Decision: Close position on SCHO, SCHZ. Open position on DSUM 200 shares @Market 25.16, accumulate on dips.


Update: March 18, 2013 After a fairly serious climb the market retreated just a bit today. Put in a limit order for 10 shares of  SCHV@34.00. I do not expect it to hit, but if it does, it will be time to be paying attention.

The overarching strategy for Cs

As I get closer to retirement, I keep trying to think about the best strategy/strategies. I need to be tax efficient and try to grow the principal.  Each of the baskets, (this is only one basket), is designed to contribute to the overall portfolio. In 2014 I do not expect to have to draw from any of the baskets for living expenses, therefore we are still in a building mode. The book Davis Dynasty by John Rothchild makes it very clear one powerful strategy is the idea of compounding. Until I need to withdraw funds for living expenses, I will keep re-investing dividends to the extent possible.

At some point, I will need to draw from the investments. On the main, I am still working from the 4% rule, even though I realize there are some hiccups in the logic of that rule. I do not need to support Kathy and I from the Cs basket entirely, but it will need to be part of our support. We will grow the basket as much as possible before we need to draw from it and then convert all the reinvests to pay us as it comes due.

The makeup of basket Cs as of March 10, 2013

Basket Cs, to be honest is a bit of a mess. But it is designed to temper the rest of the portfolio and lower volatility, while still earning money and growing principal. Here are its strategies or components from largest position to smallest:

Low cost, broad based ETFs

These cover everything from REITs to Emerging Markets to US Large Caps in 14 ETFs ( we are treating small cap as a separate strategy).  Many people would argue that you should not have multiple asset classes in one basket, but the basket is based on a strategy. There is no commission to trade these ETFs, so I buy on dips and tend to make small orders, 5 ETFs, 10 ETFs etc. I have great respect for Ken Fisher and his book Debunkery, and so-called Dollar Cost Averaging is Bunk 14. And Ken is probably right most of the time. But with no commission to trade and with patience, I think the advantage is mine. My Thesis for this strategy was based on some research I did a few years about and continues to be valid. I wish this was not true, but almost any asset class in this worldwide interconnected market correlates over time. Individual stocks can fall to zero, but these are index based ETFs, I somehow do not expect mid cap stocks to cease to exist as an asset class any time soon. Any asset class may fall behind for a year or two, but over a significant amount of time they tend to end up at about the same place. You can read more specifics here.

Fixed income

As I was closing out the original use of the basket to create Ck, all dividend stocks, I did some profit taking. I picked up some short range bonds and CDs hoping to replenish my rainy day fund as opportunities arise. This is also an effort to reduce the volatility of the entire portfolio. 19.59% of the basket.

Individual equities

To be honest, this is a result of a change in the strategy of this basket. I probably should have sold them off to make the basket cleaner, but check out IBM's 5% performance, I am not ready to profit take that just yet. I have two individual equities:
IBM 15.33% of basket
XOM 3.1% of basket

Cash on the sidelines

Need to have some money available to take advantage of opportunities. 10.81% of basket.

Floating rate fund

I used some of the profit taking cash in the account to add a floating rate mutual fund. This is a taxable, fixed rate income mutual fund (SAMBX) that should add some diversity to this basket.  I am reinvesting both payouts and capital gains. This is currently 9.98% of the basket. More information is available here.

MAPTX

Asia Pacific ex-Japan. This is from the older basket, but has performed well, so I am letting it ride. Gives me some emerging economy exposure. 8.16% of the basket.
8/1/13 24.39

Small caps

I have two ETFs VBR and SCHA that are highly correlated. Currently, they are a bit over 3% of the basket, the strategy is to patiently grow them to 10% during market corrections. More detail can be found here.

Trade ideas: STT, LQDT, BOFI

STT (Watch initiated May 18, 2014)

I think this could be an interesting play. It might fit in well in the Ts basket, which is underweight in financials. More soon, got to get ready to go to church.

LQDT (March 19, 2013)

5/18/14 13.91 glad I haven't pulled the trigger yet!
3/19/13 29.30

3/21/12 46.77

4/4/13 32.80 up 11% on the day they are in basket Ts

Liquidity Service operates various online auction marketplaces where they sell surplus, salvage and scrap assets in the United States. According to Google Finance: The Company’s marketplaces provide professional buyers access to a global, organized supply of surplus and salvage assets presented with digital images and other relevant product information. It organizes its products into categories across industry verticals, such as consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware and specialty equipment.

I am just adding the the watch list for the eCommerce basket. They have had a tough year and looks like there has been some insider trading, 50k shares in the past six months. This would be a value buy. Their web site is not as fancy as eBay though. Apparently, people shop for deals and then sell the items on eBay.

BOFI

5/18/14 75.25 I think I missed the boat on this one :) They have dipped a bit. Maybe re-research and try again with a limit.
3/19/13 35.30
1/18/13 30.18

This week while waiting for a haircut, or the dentist, or as bathroom reading, I am rereading Peter Lynch's One Up On Wall Street, especially the dumb money chapter.

Nothing I am about to say doesn't mean focus on the company's financial picture, of course that is critical. However, Peter makes the point that the individual investor's secret weapon is actual experience with the company. He, feels taking a tip from a broker, when you do not know the company is suicide. I suppose there is a risk of correlation bias, but I agree. I feel best about investing in companies I know well.

Now to be sure, I have my mutual fund basket (Ts) which has small bets on many companies, some of which I do not have direct experience with, but all of the larger bets are companies I know and track. Which gets us to Bank of the Internet (BOFI).

This was a recommendation and the logic is sound. The upcoming generation wants to do everything from their cell phones and Bank of the Internet trades in all 50 states and has no physical presence. They do not care about the personal relationship that I have with Gladys at BB&T or Claudia at Heritage. And BOFI offers the best, bar none, checking account interest rate on the planet. And for reasons that are complicated, I need to open one more bank account.

So I applied online. And it was painful. It was one thing after another. All of our money needs to be in a trust account. And the third time I was filling out that form, I snapped and just gave up. So, I am going to let this one go, at least mostly. Please do not get me wrong, it closed on:
March 1, 2013 @ 34.00

I will try to update this post over time to track this equity, I expect that it will go up, not down; the thesis is valid. I may even put it in my mutual fund if there is a decent dip, but I am not going to try to make it a core investment, I think either BB&T, Heritage or if you want to think big, Wells Fargo are better choices for me. Because, I will actually drop into their branches, because I will be interested in the Google alerts on them. I will follow and track them. BOFI, is not for me, but I am sure some twenty something will make a pile of cash averaging in to them. Their five year slope is exactly what I look for:

Investing strategy for children

A month ago, I was up on the Motley Fool web site and I read the following:

I just read this, "Start them without their knowledge. Just begin before they're old enough to ask about it! CromulentBrad's parents did this, buying shares of several companies they related to when he was little. Later, when he found out, it was exciting to see his holdings grow bigger almost automatically. He's planning to do the same thing for his 19-month old daughter.”

That seemed pretty cool, so I wrote a relative with young children and asked, "If you have the spare time, can you think of 5 - 10 companies the kids identify with. Would it make more sense to have two lists, one for each?"

And the reply was:
- Nickelodeon. Owned by Viacom. VIA
-Hmm Target TGT
-Cheerios made by General Mills .GIS
- Leap Frog..LF.. 
-Hershey ..they love chocolate milk HSY
-Suave.. There kids shampoo/ body wash owned    by bath and body works ..BBW
- Tide P&G

All of these products they readily identify with by name and use. You have come up with a very cool idea indeed! 

Now we all know that some of these products only account for a fraction of the revenue of some of these products is only a small component of the total revenue of the company, but that is not the point. The point is to get them thinking about investing.

Let's do a quick analysis.

• VIA, they are loaded up with too much debt for my taste, let's pass on this one.
• TGT, more debt than I like to see, but they have dropped a lot, partly because of the data breach, and that retail store has a loyal following. LC was 56.37. 5 shares for each kid would run 281.85
• GIS, again more debt than I like to see, but Cheerios is an enduring brand 5 shares would be around 248.1
• LF, largest children's tablet maker, market has beaten this down. Say 40 shares.
• HSY, low dividend  yield, high debt, not a compelling purchase, however, they have a go to market strategy of becoming international. 2 shares apiece.
• Bath and Body is privately held, nothing to do there.

M + S (each, please reinvest dividends)
5 TGT market 281.85
5 GIS market  248.1
40 LF market 280.00
2 HSY market 215.16
4 trade fees = 36
1061.11 let's round to 1075 each

2,150.00 total.

UPDATE 2/5/15 Just read an article in Seeking Alpha titled The best gift you can give is stock. Since I have already taken action, I am not going to do any more. But it did make me smile.

FIs A portfolio strategy based on Jim Collin's Built to Last

2/23/14 in Built to Last the comparison company to Johnson is Bristol Myers, (BMY). Let's look at the relative performance of the two:
              30         90       180     1yr         5 yr      10yr
JNJ         -2.97    -3.92    3.69    20.08      67.46    71.7
BMY      -1.21     1.37   29.95    46.71    165.18    91.5

Let's look at debt to assets, P/E and dividend yield
JNJ     ?         19.03    2.88
BMY  21.61   34.91    2.66

The Built to Last corporate responsibility part of the thesis clearly does not work in this case. Do we add BMY to the fold? Yikes, tried to buy, but the online broker was down, will set a Google calendar entry for Monday.

2/11/14 Been pondering the notion of building a company designed to succeed.  Was reading about some of the things Google is up to. Obviously Google has not been in business 50 years, however that begs the question, how likely is Google to be around 50 years from now. Just pondering.

2/7/14 Sony plans to sell their VAIO product line. They are also losing money. They may well be the first replacement from the original Built to last list.

2/6/14 Closed energy positions: APA, ENPH, EOG, EXC, now we are ready to go with the new strategy, first up for consideration is 3M.

• MMM This was one of the first 10 stocks I purchased in my investing career and have held it about 30 years. Meets the criteria and the fundamentals look fine. This is a good time to pick this up and open a position. 20@Market. Last Close (LC) 127.36
• American Express, (AXP), meets the criteria, in a heck of a great industry, have a bit more debt that I would like to see. Let's try a conservative limit, 20L@83.00 LC 83.70
• Boeing (BA), what's not to like, I live in Seattle :) Biggest downer, they have very aggressive accounting practices, sooner or later they will get taken to the woodshed. Everything else is pretty square. 20 L@120, LC121.4
• Citibank, (C), has a high beta, 2.71, let's see if we can get lucky with a mildly aggressive limit, 40@L46, LC47.06
• Ford, (F), great company, I have owned 2 F150s and currently have a Mustang GT 5.0, however, they have a lot of debt, going to pass for now.
• General Electric, (GE), will go for an aggressive limit, 130@L22.00 LC24.52
• HP, not sure they meet the criteria, hold
• IBM, this is actually one of my largest holdings, 15@M LC 174.24
• JNJ, 30@M LC 87.28
• Marriott, (MAR), I have never followed this company. Pass till I get my homework done. LC 47.89
• Merck, (MRK), do not know if they meet the criteria, Pass. LC 53.53
• Motorola, pretty durn sure we will need a replacement
• Nordstrom
• Philip Morris
• Procter & Gamble. (PG), Looks like a decent buying opportunity, 40M LC 76.45
• Sony, (SNE), I do not think they are a market leader anymore, probably need a replacement
• Wal-Mart, (WMT) 30@M LC 72.87
• Walt Disney, (DIS), 30@M LC 71.76

Thesis

I was rereading and couldn't get the table of the companies used in the study out of my head. The market is off just a bit, so maybe it is time to create a new basket. These companies, at the time of the writing, met the following criteria:

• Premier Institution in its industry
• Widely admired by knowledgeable businesspeople
• Made an indelible imprint on the world in which we live
• Had multiple generations of chief executives
• Been through multiple product (or servicer) life cycles
• Founded before 1950 (or has been around 50 years)

The companies they selected for the book:

• 3M
• American Express
• Boeing
• Citicorp
• Ford
• General Electric
• Hewlett-Packard
• IBM
• Johnson & Johnson
• Marriott
• Merck
• Motorola
• Nordstrom
• Philip Morris
• Procter & Gamble
• Sony
• Walmart
• Walt Disney

We sold our house in Richmond Va and I would like to put some of the proceeds to work. I have an online brokerage and I could never really excited over the strategy for that basket, (energy). In fact, I have only established four positions, but am up a bit over 6% which is a blessing. Tonight I will close out those positions and begin the new basket. Now we need to establish the strategy.

Built to Last Strategy

Each of the companies listed is automatically on the watch list, but so are their comparison companies.  The ones that appear to still meet the criteria will have small positions opened, (large enough so that the trade fee is < 1%). We will use the observations in the book to determine how much of the basket any given equity will be added as well as the rules of the basket.

Rules of the Basket

• There are 18 companies on the original watch list, so we will say there is room in the basket for up to 40 equities, (if we include the comparison companies).
• Therefore, new companies that meet the criteria can be added to the watch list
• Therefore, new companies that no longer meet the criteria can be removed from the watch list and the basket
• Therefore, it takes extreme merit to exceed 5% of the basket
• Money may sit on the sidelines waiting for a buying opportunity
• Equities can, ( and almost certainly will), be present in other baskets
• Additional information such as dividends, fiscal responsibility including debt load, P/E, analyst recommendations, etc may be factored into the analysis, but the criteria take precedence.

Floating Rate Funds ( Fixed Income )

The SAMBX Prospectus explains that they mostly invest in senior notes, (loans to commercial enterprises). In the event of bankruptcy, senior notes tend to be near the head of the creditor line. Therefore, while the fund might lose some principal if a note fails, they should not lose everything as tends to be the case with stocks. There are still tons of gotchas so this is a very small part of the overall portfolio, but it has its place. Let's look at two charts, the first is a ten year comparing SAMBX and a fund that is based on US Treasury TIPS, (inflation protected bonds), VIPSX, 2007 - 2014.

Now, let's look at just one year with the same two funds. SAMBX looks a lot better against VIPSX. My thesis is that people are still discounting the potential of inflation.

I use SAMBX for two reasons, to manage volatility so I can sleep at night and also as a hedge against inflation. Now it is not clear to me that wither SAMBX or VIPSX can actually be a hedge against inflation. However, if people believe that they are and start buying these funds, that should increase demand and drive the price higher. If I can get lucky and the price goes up 20% and inflation is at 5%, then these really help. Let's do one last chart, to illustrate the volatility management piece. The new color, yellow is SPY, my proxy for the S&P 500. VIPSX doesn't drop as much in the great recession because most people expected the US Government which issues the TIPS bonds VIPSX is based on to survive. But in the great recession, there was real concern that companies might fail, which was not good for either SAMBX or SPY.

The SAMBX NAV as of:

4/28/14 9.02 Well, we wanted something to manage volatility :)
3/1/13   9.02
3/8/13   9.04
3/19/13 9.05
4/20/13 9.08
5/1/13  9.09 Woo Hoo feel the engine roar :)
5/17/13 9.10
6/13/13 9.01 Hmmm, time to buy more?
6/26/13 8.97
7/21/13 9.04 Kinda wish I had moved on 6/26/13 :) Oh well, I am still working so there is only so much time to do investments right now.
7/23/13 9.05
1/6/14   9.06 In the past 6 months this hedge against inflation is up by 1%, but my expense ratio is .6, before taxes and trade fees in investment is up .4%, beats a checking account I suppose.  And there is that cute little three cent dividend. We are going to stay the course.
1/24/14 9.09 Been 2 tough days for Mr. Market, so far SAMBX does not appear to be high correlated with stocks and that is always nice.
4/3/14   9.06


1/8/14 9.08  The Chicago Tribune just ran a story on floating rate funds, they mention:

• FFRHX
• PRFRX

Lets run a comparison against SAMBX, Google cannot locate PRFRX, so we will focus on SAMBX and FFRHX.

As it is easy to see they are highly correlated. The spread at December 2013 is kind of interesting.; can't wait to see where it leads.

1/10/15 8.75
That is not what I was hoping for there are two holes in my thesis. This strategy was to reduce volatility in basket Cs. It is not like it is swinging wildly, but I was expecting slower change. And of course I was hoping it would go up not down. This still correlates with FFRHX. No action required.

2/12/14 9.08

11/29/13 SAMBX is still at 9.05, but I am happy, it adds stability to the portfolio and gives me some protection against inflation. Realize there are NO signs of impending inflation, but when I can build a shield at a bargain, what is not to like.

Update 5/2/14 Fascinating article on the topic from Oregonlive.com.
Update 4/20/13 I found this article from a year ago and he mentions PRFLX and EVBLX.
Return for 1 year, expense
PRFRX +2.00%     0.85%
EVBLX +2.25%    1.02% with a front load of 2.25% Yikes!
SAMBX +2.60%   0.62%
This March 2013 WSJ article reminds us there are risks ( thanks ) but people are considering this as a hedge against inflation (thanks again :). And they mention:
OOSAX  +2.18%   1.06% with a front load of 3.50%
RPIFX    +2.08%    .55% (sounds great, but the minimum investment is a million dollars, even if I had that to spend that would be a lot of eggs in one basket )
NOTE: return for the year is NOT adjusted for dividends, or it would sound higher.

How we got started with this 3/2/13

I was ending a phone call with Sean Fowler ( Edward Jones Auburn WA) and he mentioned that I should look into a fixed rate fund as a hedge against inflation.

Thesis

This is a type of fixed income that can serve as a hedge against inflation, it is very common to see these rates float 2% ( or even more ) above the T-bill rate. They also have the potential to smooth out a portfolio. Take a look at this risk table from Google Finance dated March 8, 2013 for one fund SAMBX:

A negative Beta and a fairly high Alpha with an attractive Sharpe ratio is what I need a bit of right now. To be sure with a Beta of -0.24 it is very unlikely I will see gains ( or losses) of 5% in a single day, but it makes sense to me to try to build an overall portfolio that smoothes out some of the highs and lows. Why?

Mr. Market is Bi-Polar (Sidebar)

Just three months ago, we were being told the world is ending, not just the Mayan calendar ( it tells you something about human nature that this was the number one question people were asking NASA), but that we would all fall off the fiscal cliff in December 2012 and have a recession.


With apologies to Men in Black for taking them out of context:
Kay: There's always an Arquillian Battle Cruiser, or a Corillian Death Ray, or an intergalactic plague that is about to wipe out all life on this miserable little planet, and the only way these people can get on with their happy lives is that they DO NOT KNOW ABOUT IT!

In our case as retail investors trying to set up a retirement, we can know about it, but we can't let it get to us. Last week as the Dow Jones set new records, the doomspeakers were already lining up. Are they right, are they wrong? Heck if I know, but I know that investing from a spirit of fear leads to poverty fast. And yet I am a human being, I feel fear, I have intuition trying to help me invest, so starting to think about smoothing out the portfolio, seems to be a good plan. Less emotional input.

Back to Floating Rate Funds Thesis

They loan corporations money and require a premium on the interest. The interest rate floats based on some metric like the Libor.  Obviously, the performance of the fund is impacted by interest rates and Ben Bernanke has kept them as low as possible for a while. Therefore, the potential of these funds to go up when interest rates go up is fairly high.

There are a number of these funds, many are very expensive ( high cost expense ratio, the industry average is 1.21%), some are only available if you are invested in some sort of wealth management type of broker. Most are traded over the counter and you may be limited  in when you can retrieve your money, once a quarter, 15th of the month, that sort of thing, so this needs to be in the long term portfolio type of thinking.

Research

The clearest explanation I have found is this Investment U article. It is well balanced and talks about the pros and cons. I have been looking for a couple of days and doing my homework and have decided that I would like to open a position in a floating rate fund.
I was down to five semi-finalists today: SAMBX, FLYRX, AFRIX, CSHIX and HFRZX. In the end I selected SAMBX, it is not the top performer in 2012, but the expense is 0.62% which is about half of the industry average.