My Wife’s Buy & Hold Strategy Still Crushing the Professionals

My wife’s buying habits are beating the pants off the market, most mutual fund managers, hedge fund managers, retirement plans, pension funds and short term traders. And all at NO FEE (free here on this personal blog).

In what started as an experiment two years ago (after years of discussing the strategy), a buy-and-hold portfolio of 22 stocks was put together to see how it would perform against the market and professional traders alike. The idea of the portfolio was to buy and sit on the stocks (no active trading – ride the ups and downs of the market with high quality companies that sell goods and services that we use most often within our household).

I put the portfolio together on August 6, 2014, exactly two years ago, titled: My Wife’s Personal Mutual Fund Outperforms the Pros.

As of August 6, 2016, the 22 stocks have performed as follows:

  • Total gain of 36.08% (not including dividends)
  • Total gain above 40% with all dividends re-invested
  • 20 of the 22 stocks are positive
  • A 91% success ratio

Further:

  • 18 of the 22 stocks have a double digit gain, averaging 44% (80% of portfolio)
  • The leading gainer, the 2nd highest priced buy, is up 145%: Amazon $AMZN
  • 2 stocks show a loss: $KORS at 36.27% and $XOM at 5.62%
  • The portfolio is crushing the DOW, S&P 500 and Nasdaq
  • NOTE: Dividends have not been calculated into these stats (2 years of dividends increase the gains).

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Not bad for buy “quality” and hold.

I completely understand that the market has been in an up-trend for much of the past two years so all I can do is compare against the general market indexes, fund benchmarks and professional results. In all three cases, this buy-and-hold portfolio outperformed them all. And they outperformed each of them without incurring additional fees, additional time wasted for research or any time actively trading in-and-out.

I wrote an update on the 2014 blog post about six months ago (February 21, 2016), showing how the strategy was winning: My Wife’s Personal Mutual Fund Crushes the Markets, AGAIN

The portfolio of 22 stocks:
$AAPL – Apple
$SBUX – Starbucks
$GOOG – Alphabet
$AMZN – Amazon
$FB – Facebook
$COST – Costco
$TGT – Target
$COH – Coach
$KORS – Michael Kors
$CVS – CVS Health Corp
$NFLX – Netflix
$DIS – Walt Disney Co
$JNJ – Johnson & Johnson
$PG – Proctor & Gamble
$V – Visa
$MA – MasterCard
$PEP – Pepsico
$TJX – TJX Companies
$HD – Home Depot
$VZ – Verizon
$XOM – Exxon Mobile
$WFC – Wells Fargo

The older I get, the more I realize that buy and hold (over a period of time), for a retail investor, will outperform most strategies within the market. Retail investors should just buy and hold low cost index funds and not entertain an idea such as the above buy if you must trade in the market, consider buying and holding the stocks of companies that you do the most business with. Know what you invest in.

The next step will be to see how this portfolio of stocks performs during a down-turn or major correction. Of course the stocks will lose value but how will they perform compared to the major indexes and other active investing strategies and professional traders.

I think they’ll do fine.

P.S.: KORS should be replaced with $MSFT (considering we use Microsoft every day – this was an oversight and bias two years ago).

The Only Way the 99% Should Invest in the Stock Market

I often get random questions from family members, friends, colleagues and social media followers that sound something like this: “I want to invest but I’m not sure what to buy, so can you recommend a few stocks.”

Or

I am saving for retirement (college fund, etc.), so where should I place my money (funds that they need to invest, commonly from an old 401k, a recent bonus, an inheritance, a stale IRA or whatever…).

They tell me that they trust my advice because I seem to know what I am doing. Perhaps it’s because I have a blog, twitter account or a Stocktwits following but I immediately reply by saying: well, be careful because I am not independently wealthy (yet), based solely on my market investments so take my advice with a grain of salt. I then go on to say: But if you are asking…

Index Funds!

What? INDEX FUNDS!

Says the guy who writes about stock investing and trading…?

I strongly suggest that the majority of people stay away from actively managed mutual funds, active investment managers, day trading, swing trading, trend trading, any trading, etc. I am not opposed to individuals buying and holding a handful of dividend paying blue chip stocks but why bother with the headache; go for the index fund and save your time for doing something fun.

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Place at least 90% of your available investment cash “the serious money” into index funds and then actively speculate with no more than 10% of the rest. This 10% can be used to buy your speculative investments like $FB, $AAPL, $GOOG, $AMZN, $TSLA, $V, etc…

William Bernstein (author of The Four Pillars of Investing) once wrote:

“It’s bad enough that you have to take market risk. Only a fool takes on the additional risk of doing yet more damage by failing to diversify properly with his or her nest egg. Avoid the problem – buy a well-run index fund and own the whole market”.

I agree: invest in one or more well-run index fund(s) that will promise a market return but with significantly lower fees. The average guy or gal in the 99% is not smart enough to “pick” the right stocks or mutual funds (or manager) at the right time. Heck, most fund managers in the 1% (Wall Street professionals) can’t do this either (data shows that greater than 80% of all fund managers fail to outperform the market over time).

Warren Buffett once noted that the moral of a story, as told in his 2005 Annual Report, is:

“For investors as a whole, returns decrease as motion increases.”

What does that mean? Well, let’s use a recent example of a bet Buffett made with a bunch of hedge fund managers back in 2007. The bet shows how an index fund mirroring the S&P 500 can outperform their actively managed funds, after fees, over a ten year period. They made a million dollar bet (winnings will be donated to charity) based on this premise and as of February 2016, eight years into the bet, Buffet is beating the all-star hedge fund managers 65% to 21%.

His Index Fund selection is crushing them and all he had to do was make a click or call to purchase the index fund and then he was done (not another minute was spent worrying about the investment). These managers (charging 2% on assets + 20% of performance) manage their funds daily and they are only 1/3rd of the return of Buffett’s choice (to date). So not only are they losing, they have spent eight years in their “professional job” losing to a fund that mimics the market.

Time = money so how do we even begin to quantify the hours spent by the hedge fund managers vs. the cumulative time that Buffett has saved doing other things. The extra time value is overwhelming so Buffett is much further ahead based on this ancillary bonus.

John Bogle (the founder of Vanguard) explains it this way in his book, The Little Book of Common Sense Investing:

“The way to wealth for those in the business is to persuade their clients, “Don’t just stand there. Do something”. But the way to wealth for their clients in the aggregate is to follow the opposite maxim: “Don’t do something. Just stand there.” For that is the only way to avoid playing the loser’s game of trying to beat the market.”

It means that the higher the level of investment activity, the greater the cost of investment fees and taxes, which ultimately results in a lesser net return for the investor.

I am an architect by degree so when I recall the famous quote by Ludwig Mies van der Rohe, “Less is More”, I suggest everyone apply it to investing as well.

Less activity equals more return for the investor while more activity results in more profit for the fund managers leaving you, the retail client, with less retirement money in your pocket (see the charts and expense ratio matrix below).

2016_04-03_Expense-Ratio-Chart-Diff

Charlie Munger stated:

“The general systems of money management [today] require people to pretend to do something they can’t do and like something they don’t. That is a funny business because on a net basis, the whole investment management business together gives no value added to all buyers combined. That’s the way it has to work. Mutual funds charge two percent per year and then brokers switch people between funds, costing another 3-4 percentage points. The poor guy in the general public is getting a terrible product from the professionals. I think it’s disgusting. It’s much better to be part of a system that delivers value to the people who buy the product.”

So based on what Buffett, Bernstein, Bogle and Munger have said…

Where do you now think the 99% should invest their money? What should YOU be doing with your money?
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Beware Leveraged Investments: How Decay ate Half my Profits

“I hear and I forget. I see and I remember. I do and I understand.” – Confucius

I placed a UWTI trade because I wanted to understand the decay first hand. Of course I could have done a mock-trade, a paper-trade or any other applicable simulation but would I fully understand the implications?

Of course I would but it always sinks in better (with me at least), when “I do it”.

Experiences last in your memory and experts say they influence future behavior. I may be able to argue that I wanted to “experience” the decay first hand so I would avoid these garbage products in the future and stick to products with less decay and daily expenses. I wanted to overcome my allure to the “3x” aspect of these products.

Here’s my trade:
Buy $UWTI 2/9/16 at $1.59
Sell $UWTI 3/7/16 at $2.23

+ 40.2%

What’s wrong with a 40% gain? Nothing, I’ll take that gain over any 4 week period but in this particular case, the product did not provide a 3x return so I was robbed. A true 3x gain would have been closer to 80% but I knew, full well, going into the trade that substantial decay would occur if I held more than one or two days.

What is UWTI (VelocityShares 3x Long Crude Oil ETN):
The investment seeks to replicate, net of expenses, three times the daily performance of the S&P GSCI Crude Oil Index ER. The index comprises futures contracts on a single commodity and is calculated according to the methodology of the S&P GSCI Index. – Yahoo Finance.

As a comparison:
$WTIC was up 26.10%
$USO was up 17.01%

These results occurred during the same period (NOTE: WTIC was up 46.47% during this period as my entry and exit was not the exact open and close on 2/9 and 3/7).

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My Wife’s Personal Mutual Fund Crushes the Markets, AGAIN

My wife’s so-called “personal mutual fund” returned 22.72% from August 5, 2014 through to last Friday, February 19, 2016 (approximately 18 months).

As a comparison, the following stock market indices performed as follows:

Dow Jones Industrial Average: -0.23%
S&P 500: -0.13%
NASDAQ Composite: 3.48%

Her buying habits CRUSHED the general markets, by a HUGE margin, just as they had from the day we were married back in 2004.

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The personal mutual fund (as outlined in the blog post, My Wife’s Personal Mutual Fund Outperforms the Pros, back on August 6, 2014), highlighted 22 stocks of companies whose products or services she religiously buys or uses on a daily or weekly basis.

Of the 22 stocks, 20 show gains while only two show a loss ($KORS and $XOM). The top five leaders are as follows:

  • Amazon ($AMZN) leads the pack with a 71% gain
  • Home Depot ($HD – actually my store) is second with a 56% gain
  • Starbucks ($SBUX) comes in third with a 53% gain
  • Netflix ($NFLX) is up 47%, a service used by the entire family
  • Facebook ($FB) is up 43%: yes I admit it, we are both addicted (very bullish going forward)

This is simple investing logic (for our family) as we use the products and services of these five companies every day (HD being the lone exception for daily use, but monetarily, it may lead the pack).

Amazingly, 14 of the 22 stocks show a double digit gain:
$AMZN $HD $SBUX $NFLX $FB $V $TJX $COST $TGT $CVS $GOOG $MA $PEP $DIS

The other six positive stocks show a gain between 0.1% and 9.94%:
$VZ $JNJ $PG $COH $AAPL $WFC

For the second time in less than two years, I am convinced that my skills, or lack thereof, are no match for the power of my wife’s product and service buying habits. Hands down, her habits are kicking the market’s a$$ and my a$$ for that matter.

Who needs a financial advisor or one of these “trendy” new robo advisors when I can just copy what she is buying and doing?

As I said back in 2014:

Peter Lynch subscribed to the idea of “know what you own”. I know what my wife owns and can take the lesson that many other wives (and people in general) are buying what she is buying. Consumers = profits and profits typically lead to earnings which leads to a rise in share prices. Sounds like a simple formula.

The formula is WORKING!

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How to Trade the Price of Crude Oil

My high level thoughts are as follows:

Oil ($WTIC) will bottom out somewhere in the $20 range (when, I don’t know). OPEC is flooding the market with hundreds of thousands of barrels each day to force the price down to the point where most if not all American companies are forced to cease operations. The bankruptcies are already piling up from 2015 and will accelerate in 2016. Once the majority close shop, OPEC will pull back production and the price will increase (perhaps rapidly).

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As it stands today, most American shale companies require crude to be at $60 per barrel to stay profitable. The leaders are getting by, by using efficient methods but the break-even point is still well above the current price level of crude oil.

Another thing we should watch is the proxy war between Saudi Arabia and Iran (hat tip to a friend on this perspective). When Iranian crude comes on-line, prices will drop again. Maybe that sends prices below $20 (unless already priced into the market, which it probably is). The United States and Russia will be squeezed tremendously, the question is, will the US bail out or prop up their oil companies (my guess is no, as that would be highly political, being oil companies). When gauging public opinion: propping up GM in 2008 is a lot different than bailing out the “big bad (& rich)” oil companies.

Bottom line: oil is not at the bottom yet and prices can drag along the bottom for a long, long time. But in the end, oil will come back up (it’s a matter of how long will that take). We just need to find the best vehicle to place this trade at the right time.

Do we do this using ETFs, leveraged ETFs (short term), futures, specific equities, etc.
Perhaps a combination of all of them, depending on the time frame of the trade.

I see crude a lot higher than it is today, 12, 18 and 24 months into the future but I haven’t determined the correct vehicle to make this longer term trade (ETFs decay, futures aren’t my game and individual equities are risky). I’ll keep you posted on my moves…

Charts: $WTIC $USO $UWTI $DWIT $XLE

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2016_02-06_USO-daily

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